The Hot Housing Market Returns?

Dave:
Hey everyone. Welcome to On the Market. I’m your host, Dave Meyer, and today we have one of our favorite repeat guests, Orphe Divoungay, the Senior Economist at Zillow, and he’s coming back to share Zillow’s predictions for 2024. Orphe has tons of really good information and we’re going to dig into his beliefs about the market that I think all of you’re going to be really interested because he does a very good job painting both sides of the equation. He gives his opinion but also offers a lot of counter opinions, and just to give full context to everything that’s going on in the market. I think it’s a really nice, well-rounded discussion that you’re going to learn a lot from.
Before we get into it, I also want to tell you we have a really special show coming up in the next couple of days that’s going to feature Orphe, our guest today, again. He’s going to be joining us alongside Chen Zhao, who’s an economist for Redfin. So we’re going to be doing this cool economist roundtable that’s going to be coming out on January 3rd. It’s the first time we’ve done this. Obviously, when Kathy and Henry are James are here, we all know a bit about the economy and talk about it and enjoy talking about it, but having two people who do this all day long, focus on housing economics, debating and conferring with one another about what might happen next year is a super cool opportunity. So don’t miss that show on January 3rd.
All right, that’s what we got for you guys today and again, make sure to check out that future show. No further ado, let’s get into today’s show with Orphe Divoungay, the Senior Economist at Zillow. Orphe, welcome back to the show. For everyone who missed your first appearance on On the Market, can you just tell us a little bit about yourself and your involvement at Zillow?

Orphe:
Totally. Yes. I am Orphe Divoungay, a Senior Economist on the Zillow Economic Research team, and my role at Zillow is to keep track of everything that’s going on that could impact the housing market, especially macroeconomic policy, fiscal policy, monetary policy, how that affects the inflation picture and mortgage rates since they play such a big role in determining housing market activity.

Dave:
I do want to talk about 2024. I think everyone listening is curious about this, but before we do that, let’s just do a little bit of a rewind and talk about the last year. Do you have any reflections on data predictions you made in 2023? I’m sure there’s too much to… Let me be specific. How about inventory? Let’s just pick a topic that I think inventory was such an important factor in 2023. What are your thoughts on how we did with 2023 in respect to inventory?

Orphe:
First, let me just start by saying going into next year, I think the housing market’s going to be a big reset, right? So housing market’s resetting. We’re seeing a normalization in terms of price growth and rent growth. We were faced with a supply constrained housing market for most of 2023, but things are improving and new listings are no longer declining. The deficit in new listings relative to the flow of homes coming on the market monthly before the pandemic, that deficit has shrunk. And so we’re starting to see that new listings are probably not going to be as much of a drag on inventory as they’ve been in the past. You’ll also have more new construction homes under construction right now, still near an all-time high, and so we’ll have more inventory coming in 2024.
Now, going back to 2023, it’s been a story of a supply constrained housing market, right? Yes, demand had fallen a little bit, but supply fell by a lot more. And as a result, price growth continued, prices continued to increase pretty strongly. But transaction, the number of homes sold declined significantly in 2023. In terms of my predictions, my past predictions, so I mentioned to you Dave, I also have a podcast and we decided to do an episode where we would confess all the things we got wrong in terms of [inaudible 00:04:30].

Dave:
Yeah, I like doing that at the end of the year. It’s important to purge everything that you [inaudible 00:04:35].

Orphe:
Hopefully we learned a thing or two during the past year.

Dave:
Exactly.

Orphe:
I think the consensus for most economists at the end of 2022 was 2023 was going to be a slow year in terms of everything. The stock market was probably going to plunge a little bit. We were saying, “Hey, the soft landing scenario is unlikely. The Fed cannot break down inflation without causing the unemployment rate to increase.” Some people, I call them the charlatans of doom and the prophets of gloom. Some people went extreme and thought, “Hey, everything’s going to crash in 2023.” Some of us that I think were a little bit more reasonable in thinking, “Okay, maybe we’ll end up in a mild recession,” and the US economy managed to avoid all that. The consumer is extremely resilient. The Fed’s probably going to deliver soft landing. I say probably because it’s not assured yet. And so it’s just been full of beautiful surprises.
The stock market, the S&P 500 is up almost 24% year-to-date, real incomes have increased after declining in 2022. Financial wealth’s increased after declining in 2022. Housing wealth increased, declining in 2022. So 2023 has been a fantastic year for the American household.

Dave:
Yeah, I do want to get into that because I think a lot of people hear that and probably don’t feel that directly, but when we talked, you said this last year is a supply constraint and in 2024 you think we’re starting to see some inventory. Can you provide just some context behind that? How low is inventory compared to pre-pandemic levels or to historical average?

Orphe:
Yeah, last time we checked, I think inventory is something like 40% below pre-pandemic levels is a huge gap to fill. It was basically due to the flow of existing homes well below normal. That’s actually changed. New listings are now 14% below pre-pandemic levels. The flow of existing homes coming on the market on a monthly basis is now down 14% compared to pre-pandemic levels. This year was down 35% at some point. And so we’re starting to see this improvement in the flow of homes coming on the market, despite the fact of course that the majority of homeowners, like 92% or 93% of homeowners have a mortgage rate below 6%, and so we’re really seeing this improvement.
I think a lot of sellers are starting to think, “Okay, things are looking good. I still have my job. The unemployment is 3.7%.” Life events are getting people to shake loose from that rate lock and potentially come back, and I think that’s positive for housing going forward. And it’s reflecting, if you look at the real estate valuations in the stock market, it’s showing, right? The soft lending scenario is conducive to more housing market activity.

Dave:
Got it. Okay. Well, I agree that it would be positive if this is correct, but I just want to make clear. When you talk about seeing inventory loosen up for 40% of where we were pre-pandemic, you’re not talking about a recovery to pre-pandemic levels, are you?

Orphe:
No, not necessarily. I think we’re still far. More needs to be done, but I also think that we’re starting to see public support. Zillow research shows public support for land use and zoning reforms is up. Pure research also confirmed this recently with their surveys. I think political support for land use in zoning reforms is also increasing across the country. And so there’s going to be more and more pressure to allow builders to build, and so new construction is really going to help fill those gaps I think going forward. So more needs to come for sure, but we’re not going to have this big drag on inventory, the flow of existing homes coming on the market declining further. I think new listings have already bottomed, and so we’re not going to have this drag, and I think that’s why I am optimistic about housing in 2024.

Dave:
I hope you’re right. I really do. I think the new listing more inventory is a solution we all would be very happy about, so let’s hope for that. Before we go into 2024 further, let’s just talk one more thing about 2023, and that’s just rent. Usually this time of year we see rent going down a little bit, but just paint us a picture of what your research shows happened in rents this past year?

Orphe:
Yeah, rent growth has slowed, and I think when I say the housing market is normalizing, I mean rent growth has slowed to about 3.3% on an annual basis, year over annual rent growth, 3.3%. Normally before the pandemic rent growth, annual rents would increase by about 4% every year, and so rent growth has slowed. Rent growth has slowed more in the multifamily sector than in the single family for single family homes because of all this building, all this new construction. So multifamily construction on a tear during the pandemic, and so rent growth has slowed more in that sector.
And so again, it’s not quite reflected in the official figures yet, in the way the CPI is measured, inflation is measured, but rent growth is cooling and part of that is due to the fact that you’ve seen such an uptick and the number of new homes coming on the market that are basically for rent, whether single family but also the multifamily sector.

Dave:
Got it. All right, thank you. So just to summarize what we’ve talked about so far, it seems like you agree, inventory was really the main story or one of the main stories here in 2023, but you’re predicting, and I hope you’re right, that inventory or new listings at least have bottomed for this cycle.

Orphe:
That’s right.

Dave:
And we’ll start to see an increase, and rent growth has slowed for all the reasons that you just mentioned. So far, we’ve discussed where we are in 2023 and next we’re going to talk about Zillow’s 2024 predictions, but before that, we got to take a quick break.
Hey everyone, welcome back to our show with Orphe Divoungay, Senior Economist from Zillow. This is the very juicy part of the show where we get to hear about Orphe and Zillow’s 2024 predictions. We’ve talked a lot, Orphe, you and I, but I’d love for you to just tell me a little bit about what you see in the 2024 macro situation, not as specifically into the housing market?

Orphe:
I can’t make any big bold predictions here because it’s very difficult to forecast mortgage rates, to forecast the yield curve in general. I think when we got into December, what we saw was financial conditions easing a tremendous deal since October. And as a result, you saw retail sales increasing more than expected. You saw a small uptake in core inflation, you saw activity rebounding somewhat in the last month or so. And then we get to December and the Fed, with their most recent meeting, pencils in potential rate cuts in 2024, fewer rate cuts than the market was anticipating. And yet you saw the yield curve, right? You saw the yield reaction, the bond markets reacted strongly to that, and the 10-year yield continued to decrease and mortgage rates fell. Mortgage rates fell more than a full percentage point in the last month, in the last six weeks, and mortgage applications have increased for five consecutive weeks now.
And so activity is rebounding and I guess that begs the question, will we continue to see this inflation at the same pace or will it slow down because activities rebounding in financial conditions have eased so much? Which is why it makes it very, very difficult. All of these factors are affecting where yields are going to end up, and of course, we know that the 10-year yield, mortgage rates tend to follow that 10 year yield. And so it’s very, very difficult to put our finger on where yields are going to end up and where mortgage rates are going to end up in 2024.

Dave:
Yeah, that makes sense. Obviously we’re all interested, but no one knows for sure, but that’s good context to help people understand some of the things that will play into it. But just tell me about the US economy in general? You talked a little bit about will inflation heat up again given the market’s reaction to recent Fed news. Do you see the economy heating up, slowing down or just absent housing markets, absent yields? Let’s talk about just GDP and where you think that’s heading?

Orphe:
The economy is definitely still slowing. We saw compared to last year or even just a quarter ago, we have real GDP above 5% in quarter three of this year, the seasonal annual adjusted rate. That’s cooled down. You look at GDP now, real GDP is now estimated about 1.2% for quarter four, and so the economy is slowing. The good news is the labor market’s been very strong still. The unemployment rate is 3.7%, wage growth now outpaces consumer price growth, inflation, and so real wages have increased. Consumer purchasing power has increased. And I mentioned earlier, wealth has increased, whether it’s financial wealth or housing wealth has also increased. The economy is on pretty strong footing. It’s slowing, it’s moderating I should say, but we’re nowhere near what people would consider a potential downturn going into the new year. In fact, recession risk is receded. I think most people are optimistic that the Fed will stick the landing this time around. And so that’s where we are.
Now, going into 2024, there are potential headwinds, of course. We should definitely celebrate the win. We brought inflation down six points in a year, and I think that’s a huge accomplishment. We have the Fed now talking about potential rate cuts. I think that’s a huge accomplishment, but there are potential headwinds coming forward, headwinds to the US economy. The headwinds to the US economy are going to be the fact that we’re going to go into this election year with maybe more political polarization, and that’s kind of disinflationary.
I think when people face uncertainty, they sit back, they pull back. And so that’s going to be a headwind going forward. You have geopolitical tensions, you have a couple of wars going on abroad right now, and that’s going to cool global GDP and also show up in the US economy. You have the corporate tax cuts that might expire this year. That’s also going to cause activity to slow down and be potentially disinflationary. So you have all of these factors at play going into in the new year that we need to keep our eyes on. And maybe one that everybody’s been focused on is debt maturing for large non-financial companies going into 2024, and they might not be able to refinance at the much higher rates that they would face today. And so that’s another big headwind to the US economy going forward.
And so that’s where we are. That negative pressure of course will cause yields to decrease, put pressure on yields to decrease going forward and that might show up in mortgage rates. Unfortunately, the uncertainty, the increased uncertainty related to policy and what government government’s doing in Washington DC might cause the spread between the mortgage rate, the 30-year fixed rate mortgage and the 10-year Treasury from declining as much as a lot of people think it might going forward.

Dave:
Yeah. Well, Orphe, you just said a couple of important things, so I just want to recap a couple of things here that you just said. So first of all, I think it’s really important and appreciate you saying you’re thinking things will probably go decently, but there are some significant headwinds. You named a couple of them. I think what’s important to note here is the so what of all this, is what happens when there is increased uncertainty or there is an increased fear of recession or declining GDP is a lot of investors globally flock to safe investments. And what that means is they take their dollars or their money, whatever currency, and they typically often buy US government bonds. And that means there’s more demand for US bonds and that pushes down the yields. So basically if more people want to buy the government bonds, the government doesn’t need to pay as high an interest rate on those bonds. That pushes down bond yields and that takes mortgage rates down with them.
So I think what Orphe is saying is yes, obviously these big GDP headwinds have implications for the whole world and the whole economy, but specifically the housing. I think it’s really interesting because it’s this whole upside down world we’ve been in the last year or two with housing where bad news is good news and good news is bad news, where if the GDP goes down, that might be one of the primary things that pushes mortgage rates down. So just want to make sure everyone understands that.

Orphe:
You got it spot on, Dave.

Dave:
Oh, thank you. Well, one of the things that you also said that I wanted to discuss was that during election years, people are a little less certain, and that might be at the consumer level, that might be at a business level too. Businesses may choose not to invest if they don’t know what policy might look like in the next year. Do you think there’s a risk that that uncertainty and perhaps sitting on the sidelines spills into the housing market as well, or do you think the potentially more favorable affordability will offset that?

Orphe:
That’s a great question. I think that’s where the risk comes from. So if businesses are worried about policy, tax policy for example, or about where the US economy could be headed post-election, or if there’s a highly contested election or if we’re still debating debt limit ceilings and paying our bills, then hiring would slow. And if we start to see the labor market cooling more and we start to see the unemployment rate rising more, that could definitely impact the housing market.
I always say, look, it’s one thing to wish for mortgage rates to come down, but the last thing you want is to lose your job because you can’t qualify for mortgage if you lose one, if you lose your job. Right?

Dave:
True.

Orphe:
And so it’s really important that as we continue to wish for mortgage rates to ease, that we don’t wish for mortgage rates to fall off a cliff.

Dave:
Totally.

Orphe:
Because that would mean we’re in a lot of trouble.

Dave:
Exactly. Yeah. People are like, “Oh, rates get down to 3% or 4%.” It’s like, “I don’t want that.” That means we’re in a pandemic or we’re in a massive global financial crisis.

Orphe:
That’s right.

Dave:
Please know, something has gone wrong if mortgage rates are 3%. And clearly, we’ve seen that over the last couple of years.

Orphe:
That’s right.

Dave:
So I agree. I’m all with you in terms of… I’m not making a prediction here, but my hope would that rates come down slowly as appropriately. And so it’s an appropriate balance of restoring some affordability of the housing market, while maintaining a growing US economy. Let’s all hope that’s possible.

Orphe:
That’s right. When I think about the headwinds and tailwinds, I think rate stability, finding that new level, that new normal is what I’m hoping for in 2024 because it means we’ve accomplished the elusive soft landing.

Dave:
It’ll be interesting to watch that. So let’s just go full shift into 2024 and about what Zillow is looking at. So what are the things you’re really interested, other than what we’ve talked about before, looking into in terms of the housing market, what’s getting you excited about next year?

Orphe:
Yeah, I think affordability is going to continue to reshape migration trends. You’re going to continue to see some of the more affordable markets attract more and more people. So we look at these markets and we see markets like the North Carolina, Charlotte, North Carolina as one of those markets that’s still attracting people, the Nashville, Tennesses are attracting people. The Florida markets, despite some of them actually being quite expensive actually, are still attracting people because the people that moved there are moving from places that are more expensive.

Dave:
Yeah, California and New York, right?

Orphe:
Exactly. And then you have Californians moving to Arizona and Texas. And so you’re seeing… I looked at the latest American Community Survey data and 30% of Californians were moving to Florida, Texas and Arizona. I see these markets and I say, “What do these markets have in common?” Well, first, they’re relatively less expensive than the markets where these people are coming from. But at the same time, they offer larger mix of housing options for people and they’re building quite a substantial amount. And so those are factors I think, that are going to continue to drive the hottest markets in 2024.

Dave:
Got it. What other insights, maybe you can tell us about the market next year? Maybe dig into different types of asset classes, suburbs versus urban areas? Are there any other insights that you have or you think markets that might perform better than others?

Orphe:
Yeah. No, I think migration I think is going to be a thing. Maybe potentially seeing that given the hybrid situation that we’re seeing developing.

Dave:
For work, you mean hybrid?

Orphe:
Hybrid work from home, that’s right. There is potential for people moving back to some of these areas that had lost some population during the pandemic. I think you’re going to see people trying to shorten their commute. By the way, because we’re optimistic, more people will move in 2024.

Dave:
Oh, interesting.

Orphe:
I think that’s likely to develop as you see some of these big markets where people had moved further away, they might actually move back to those areas closer to the office. That’s a potential reality. You look at these markets like San Francisco for example. I don’t foresee a continued decline in a market like that despite the affordability situation. So that’s kind of what I think when it comes to urban versus rural.
In terms of who’s moving, I think altogether, people still prefer the stability of home ownership. Zillow research shows that the bulk of home buyers, I think something like 78% of home buyers have at least a pet or a kid. So their parents or they have at least one pet because it’s still tough for some renters with large pets especially to get the options that they want and need.
At the same time, families prefer to have or give the kids stability, and so they don’t necessarily want to be moving a lot. And so I think people still prefer the stability of home home ownership. The big question was of course, can they afford it?

Dave:
That’s it.

Orphe:
And what we’re basically seeing is that with price growth easing well into 2024 and with mortgage rates easing somewhat like we’ve seen recently, the affordability improvements are going to pull some of these people that are on the fence into home ownership. It’s going to help a lot of people get on the ladder that were sitting on the sidelines.

Dave:
Got it. All right. Well, that is super helpful. Now, Orphe, on the last show we did ask you a little bit about your own investing and if you are planning to become an investor, are there any updates there?

Orphe:
Yeah, I’m looking at homes in the Bellevue, Tennessee right next to Nashville market.

Dave:
Oh, cool. Nice.

Orphe:
Just like everybody else, I’m trying to take advantage of these mortgage rates that are basically giving people the opportunity to hop on the housing trade. The train is slowing a little bit, it’s time. If you can run fast enough, you might as well because you’ll be able to hop onto this moving train. And so with mortgage easing right now, of course, I’m looking at every option to get more housing.

Dave:
Awesome. Well, yeah, we’re recording this in the middle of December. So the Fed news was just recently, and I do think I agree with you. This is just opinion here, nothing hard, but it does feel like there’s this window right now where mortgage rates have dropped a little bit. We were chatting before the show saying that we both think this is an encouraging sign, but rates might go up a little bit again. We haven’t found equilibrium here, so to speak, in terms of mortgage rates, but prices are a little bit softer, so this might be a good time to buy. So Orphe, next time you’re on, I think you’re going to have your duplex or your first rental property, hopefully so.

Orphe:
I got to make another very important point here is that it’s very rare that mortgage rates ease and prices in the housing market ease at the same time, and we’re not in a recession.

Dave:
Yeah, it’s true. It’s like a trifecta right now.

Orphe:
It is as solid as it is right now, right? With an unemployment rate at 3.7%. It’s very rare, and essentially what we’ve seen in November, it’s what we’re seeing in December heading into the holiday season. It’s an amazing gift, an amazing opportunity for those who have been saving, who may have been outbid during the pandemic or who may have been pushed to the sidelines because of rising mortgage rates. It’s an amazing opportunity to get on the housing ladder.

Dave:
Awesome. Well, that’s a great way to end. Orphe, thank you so much. For people who want to follow you, where should they do that?

Orphe:
Yeah, zillow.com/research is where all of our work goes. And of course, you can find me on LinkedIn on social media and happy to answer any questions or keep the conversation going.

Dave:
Awesome. And if you want to get more of Orphe, he’s going to be on another show here on On the Market in just another week or two, where Orphe and Chen Zhao from Redfin are going to be joining us for an economist panel. So we’re going to have a roundtable discussion, not with the normal On the Market crew, but with Orphe and Chen, two previous favorite guests of many of our audiences, and so we will have him back. So make sure to check out that show in a couple of weeks. Orphe, again, thank you so much.

Orphe:
Thanks for having me, Dave, and looking forward to the next one.

Dave:
On the Market was created by me, Dave Meyer and Kalin Bennett. The show is produced by Kalin Bennett, with editing by Exodus Media. Copywriting is by Calico Content, and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.