What Zillow Knows About the Housing Market in 2023

In this episode of the Top of Mind podcast, Mike Simonsen sits down with Dr. Orphe Divounguy, Senior Economist with Zillow's Economic Research team, to talk about what’s on the horizon for the housing market this year. Dr. Divounguy shares the latest findings from Zillow’s monthly market report, reveals which markets dominated Zillow’s “hot markets” list, and offers his perspective on recession risk, construction trends, and more. He also explains why a debt ceiling showdown in Congress could slam the brakes on the housing market.

About Dr. Orphe Divounguy

Dr. Orphe Divounguy is a Senior Economist with Zillow's Economic Research team. His columns have appeared in The Wall Street Journal, CNN Business, USA Today, the Chicago Tribune, Crain’s Chicago Business, and other major publications. Dr. Divounguy is also a frequent television and radio guest with appearances on CBS, ABC, Fox, and other stations across the nation.

The team’s research can be found at https://zillow.com/research and includes analyses about for-sale and rental market dynamics, fair housing, and other topics. Zillow also provides dozens of housing market datasets freely available for download at https://zillow.com/data.

 

Here’s a glimpse of what you’ll learn: 

• The latest findings from Zillow’s monthly market report
• Why affordability will make or break the housing market this year
• Which markets dominate Zillow’s “hot markets” list and why
• Orphe’s frameworks for understanding recession risk and construction trends
• Why homes in risky climate areas might actually increase in price in the future
• One surprising risk that might spike mortgage rates this spring

Resources mentioned in this episode:

• Dr. Orphe Divounguy on LinkedIn
• Dr. Orphe Divounguy on Twitter
• Zillow
• Zillow Research
• “Mortgage Rates Fall as New Data Backs up Falling Inflation, but Debt Fight Could Roil Market”
• Mike Simonsen on LinkedIn
• Altos Research

About Altos Research

The Top of Mind Podcast is produced by Altos Research.

Each week, Altos tracks every home for sale in the country - all the pricing, and all the changes in pricing - and synthesizes those analytics to make them available before becoming visible through traditional channels.

Schedule a demo to see Altos in action. You can also get a copy of our free eBook: How To Use Market Data to Build Your Real Estate Business.

Episode Transcript

Intro 0:04

Welcome to Top of Mind, the show where we talk to real estate industry insiders and experts about the biggest trends impacting the market today. Enjoy the show.

Mike Simonsen 0:16

Mike Simonsen here. Thanks for joining me today. Welcome to the Top of Mind podcast. This is where I talk to the smartest leaders, thinkers and doers in the real estate industry. For a few years now, we've been sharing the latest market data every week and the Altos Research weekly video series. With the Top of Mind podcast, we're looking to add context to the discussion about what's happening in the market from from the leaders that people who are are creating other views and what we have inside altos. Each week, of course, Altos Research tracks every home for sale in the country, all the pricing all the supply and demand all the changes in that data. And we make that available to you before you see it in the traditional channels. And people desperately need to know what's happening in the housing market. Right now. The market was frozen, so solid last fall, and now suddenly, the landscape is changing again, everyone is worried about what might happen in 2023. So, you know, if you need to communicate about what's happening in this market to your clients, your buyers and sellers go to altosresearch.com book a free consult with our team and and we'll dive into your local market and we'll talk about how to use market data in your business. But speaking of data, and informing the participants to buyers and sellers in the housing market, I have a terrific guest today. Dr. Orphe Divounguy. Orphe is a senior economist with Zillow with with Zillow economic research team and you may have read his columns in the Wall Street Journal's CNN BUSINESS the hill National Review USA Today. Chicago Tribune and and cranes business or seen him on on TV speaking guest on CBS, ABC, FOX and other national news channels. Orphe is really one of the top experts on what's happening in the housing economy right now. His perspective from Zillow is really going to be fascinating to see what we can learn today. And so I am super excited to talk with him today. So Orphe welcome.

Dr. Orphe Divounguy 2:27

Thanks for having me.

Mike Simonsen 2:30

So it's really great. And you You and I have interact on Twitter and LinkedIn. And I've started to really get a sense of your perspective on on the market. But But before we dive into like, right into the data, give me a little bit of background on you, how you got here, how you how you developed your expertise.

Dr. Orphe Divounguy 2:50

Yeah, that's, that's right. We have a name like Orphe Divounguy that's the first question I always get like, where are you from? I was actually born in a small country in Africa. And I was really curious about economic development, right? So like, why is it that some countries are blessed with vast amount of human and physical capital and grow really fast, and others don't, right. And so I spent a little bit of time at the Financing for Development Office at the United Nations, and then decided to embark on a journey to do a PhD in economics. And that journey led me to the University of Southampton, just about 90 90 minutes south of London. And there, I met some really interesting people, researchers, and my interest really shifted to focusing more on the causes and consequences of trading delays in markets. Right. So the housing market is a perfect example of this, right. So if you consider credit and housing markets, the fact that they're linked the most people must get a mortgage before they can buy a home, that process takes some time, but then you get on to the housing marketing, then you have to look for the right home for buyers for sellers and domains getting the right to offer and you have multiple people with multiple offers to consider. And so that process takes time. And so how difficult it is to secure a home loan will have an impact on the number of home shoppers in the housing market and how long it's going to take to sell your home. Another good example of the impact of trading and delays is if you if you think a little bit about the people who have to finance these mortgages, there is a cost of holding funds liquid. And so if it takes longer for buyers to find a home like we saw during the pandemic, there were bidding wars, it was really difficult for a buyer to get in a home. Then the net present value of lending to potential homebuyers goes down. And so as a result, these lenders must be compensated with higher mortgage rates, of course, right. So when the activity is so, so robust, everybody wants a loan, you expect mortgage rates also to increase. So that's kind of my background and how I got into this. So I studied the housing market So I started late studied labor markets, and also credit markets and kind of the the interaction between the between these markets, and how traded trading delays or frictions in these markets might actually affect bargaining power and price formation in those markets.

Mike Simonsen 5:16

That's a really interesting perspective. The the trade or trading delay is equals inefficiency. And therefore,

Dr. Orphe Divounguy 5:28

it Yeah, you can get, it's probably because you have maybe congested markets, right. So imagine we'll choose right, so as people you saw during the pandemic bidding wars, you had open houses with 40 50 people waiting outside, right, so you have these congested markets. And so you know, as a buyer, the likelihood that you get the home goes down when there is a lot of offers, right? So that will also inform like, you go in the market, like, okay, maybe I'm not going to be able to get this house over here, because there's so many offers. I love Zillow’s website, because even for renters, you can see how many applications have been submitted for rental, for example. Right. And so that will inform your strategy. Okay. Should I apply for multiple homes at the same time? Where do I have a better chance? Right, and so, so these Yeah, these congestions in the market will definitely impact your strategy.

Mike Simonsen 6:18

So okay, so that's really fascinating. And does the trading delays? Does that that interest in trading delays? does that tie back to the some of the developing economy work that you were doing early? Like, is there? Is there a relationship there? 

Dr. Orphe Divounguy 6:36

That's a good, that's a good question. I moved away from it altogether. I moved away, a little moved away from it altogether, just got really fascinated with with with the dynamics of these markets and these frictions in the markets. I did an interesting paper back in grad school that looked at how these frictions might actually influence migration decisions, people will move from one place to another depending on housing, market, and labor markets, right. And so And these, of course, these frictions in the market that will determine where to search and where to go, where do I have a better chance of landing that job? I'm after? Right? And so yeah, so they you can think of potentially going back using that knowledge to go back and study why people migrate legally? Or what could end up when you look at international migration? Why do people migrate legally? Why do some workers end up working illegally in some countries? What are the long term effects? So yeah, we can we can apply it in various ways is absolutely fascinating.

Mike Simonsen 7:37

Yeah, the Labor lag time in real estate is a fascinating one. But one of the, one of the bands, or one of the complaints that that the, the the Twittersphere has about about the real estate market is there are one and a half million realtors, and there's and there's only a few, whatever, there's 500,000 homes on the market, you know, like and so there's a lag between the the, the hot real estate markets and the the number of Realtors participating in it. Let me run Mike's hypothesis by you and see if you buy this. So I have a hypothesis on the real estate and the realtor industry, which is the we we always have the perfect number of Realtors would maybe a little lag, because it's it is a it's actually really efficient to get in and out of the real estate industry where the conventional wisdom in the industry is that there's too many. And I feel like all we always have the right amount, maybe with a little bit of like, what do you think about what do you think about Mike's hypothesis?

Dr. Orphe Divounguy 8:42

Well, yeah, I mean, I don't think anybody goes into the market, if they don't think they're going to be able to sell homes, right? If they don't, if there's no expected profits from going in, and becoming a realtor, we shouldn't see a lot of realtors going in AI into the industry because they they see potential. So yeah, I tend to agree with you in the sense that I don't think there are too many realtors. I think that realtors are well informed and they are going into the profession. People go into the profession because they believe that that there is opportunity in that in the industry. So yeah, I think I we just have too few homes in the market right now. Right? Whether you look at existing homeowners not selling their homes currently or choosing to sit out the market or the fact that builders just haven't built enough for the needs that are out there.

Mike Simonsen 9:33

Yeah. Okay. So that is an excellent segue. So let's start talking about the market. So So you've been at Zillow for about a year or so. That's right, about seven, eight months. Yeah. So what are you finding at Zillow? What kind of information are you in fact before we dive into that, let's talk about first about your perspective on the market for 2023. What what I've noticed that you're you're sort of fairly optimistic in a city that can be pretty pessimistic about home prices and economy. Give me your overall view right now. It's near the end of January so

Dr. Orphe Divounguy 10:07

Yeah, that's right. I think I think we saw that kind of deep freeze in 2022. And I, I'm optimistic because when you look at December, December, data that came in home sales fell by less than expected, you're seeing that mortgage rates fell for four consecutive months, right, trending down. And and buyers are out there, they're waiting and ready to pounce in the first couple of weeks of January, what we saw was an uptick in mortgage applications. And so this notion that buyers are sitting it out, and they're not going to come back, I don't subscribe to that too much. I think affordability being the main challenge in the market. And 2022 means that as affordability improves even just a little bit, we should see buyers come back to the bargaining table.

Mike Simonsen 10:52

The marginal buyer and affordability is is pretty impactful. That's right. So so do you have a view on coming recession?

Dr. Orphe Divounguy 11:05

I think so. Yeah. It's very difficult. Right? You see, you look at all the pundits out there, right. So last week, two weeks ago, everybody was screaming, hey, recession, recession, recession this week, people are saying, hey, maybe maybe we could avoid a recession? Yeah, I think we should just bring it back down to like the basic blocks of every economy. Right. And to me, the basic blocks, the way I think about it is not its households, right. And so you have to think about consumption makes up roughly 70% of GDP. And so what's going on with households, right, inflation is still too high or breath roughly 6.4% Still outpacing wage growth, which means basically, people are being squeezed, the Feds raising interest is still raising interest rates. And so of course, that's going to squeeze households, the savings rates has dipped from roughly 7% to less than 3% in 2022. And so people are have are using up all of their savings, and are not saving as much as they used to credit card debt rose by roughly 15% in 2022. So yeah, it paints a kind of a dim picture for the household, will households be able to kind of sustain all of the headwinds and continue to push the US economy ahead? That's a big question, then it then you have to look at business investment, right. So roughly 12 to 15% of GDP falling residential investment, right. So less new construction, housing starts, we saw decline tremendously in 2022, that historically precedes a recession. And so you look at you look at the history, you look at housing starts falling, and that's a predictor that a recession is coming. And yet, construction, employment is still very high. So housing starts may have fallen, but it has a record number of new homes under construction. And that's keeping the industry going. We also see interest rate sensitive industries cutting back a lot. So we saw the tech sector, great business also cut back in terms of employment. And so that kind of gives you a picture of where businesses are at. We know that if the man weekends further, they're going to pull back, they're already somewhat pulling back on hiring. But then they're not laying off layoffs haven't picked up that much yet. Alright, so so that gives you a picture for businesses. And then you have to worry about government, right? Another major block government fiscal policy, there's always some uncertainty there, but a divided government tends to do less. So that could potentially be a good thing, fewer potential new shocks to worry about. However, we also have the debt ceiling risk, which I wrote about last week, any delay in addressing this issue could actually raise borrowing costs, and push the economy into contraction territory. So that kind of gives you a kind of picture, a complete picture of how I think about these things. And when I hear predictions out there.

Mike Simonsen 13:51

That's that's actually exactly what I was looking for your framework for how had to analyze what may be coming. The the, and the thing that it triggered in my mind was about the trading delay, the delay between these economy that the economy impacts, and there are some, there's some obviously weakening factors that you were talking about in there and in the delay between that and jobs, and the delay between jobs or or the the, the headwinds on the household and, and the I gotta sell my house I can't make my mortgage payment. Right and and so that trading delay in some of the factors I've seen is like, if you think about if you think about I lose my job, I'm out of my job for 490 days now I'm worried about making my mortgage payment. Then I stopped making my mortgage payment. Now I worked 90 more days before I start getting in a distressed scenario. area with the bank that six months at a minimum delay before we start seeing housing inventory in there. So,

Dr. Orphe Divounguy 15:10

by the way, by that time, by that time the US economy could have rebounded, you could have gained a new job.

Mike Simonsen 15:16

Yeah, yeah. So So then do you see that given those things is known, we look at 2023 and into 2024. Do you what's your overall, what's your take?

Dr. Orphe Divounguy 15:30

Yeah, I think there are significant headwinds. But But I think I, you know, I want to camp but we could avoid us, we can avoid this recession, this this recession everybody's talking about Yeah. And so what does that actually mean for that for the housing market, it means that the buyers waiting in the wings will still be there, and we should be ready for that upswing, right for that rebound. Now, the other issue, though, is that potentially treats may not fall that much more than they have already. Right. And so that's a, that's a bit of a concern, right? So a lot, we thought with inflation coming down, and kind of the US economy slowing right, and the risk of recession, increasing, mortgage rates would continue to drop. But if we avoid that recession, right, and if maybe if the markets overpricing the risk of recession, then mortgage rates might actually just continue to stay where they're at, and they might not fall further. Now, the good news is that a lot of research just shows that there's still about 12 million Americans that could afford mortgage, the mortgage people the typical mortgage payment in their local market, even at 7% mortgage rates. And so and so I think that people will move their move for different reasons, not just because of the mortgage rate, I think the mortgage rate happens to be kind of in the budget constraint, right? It's the constraint on your decisions. So people, I think people will get back to normal, we'll get back to moving and if they can afford to do so. And so I'm fairly optimistic that even if mortgage rates hover around 6%, and stay kind of where they're at, we're going to see people come back into the market and the market will start to, to head back in a positive direction. Now, of course, I think the constraint for housing is still going to be on the inventory side, but I follow your work as well. And I look at our data. And an inventory is just not increasing at the pace that a lot of people thought it was going to be increasing at with a market slowdown.

Mike Simonsen 17:25

They have certainly been lower than I've expected it to be. So okay, that's terrific. And it's an excellent segue to to the next parts that I'm interested in. So you've been with Zillow seven eight months. You just published the December, Zillow housing market report any any surprise findings in that one?

Dr. Orphe Divounguy 17:44

Yeah, again, I was I'm fairly optimistic on the team. Right. So I don't think I was too surprised to see that basically, I think homebuying activity picked up a little bit in December, we expected it to fall much more than a dead we saw existing home sales falling by less than expected. I think there are buyers, there are shoppers out there that wanted to take advantage of these falling mortgage rates. And I think we're going to continue to see that in heading into January. And it even going into the spring home buying season. Of course, that depends on whether or not there are new shocks along the way. But if if mortgage rates continue to hover around where they're at 6.1% or so I think a lot of buyers will start to head back into the market. The challenge, again is new listings are down continue to be much lower than they were a year ago. And so there's not a ton of new existing homes coming on the market. And so I think that's going to remain a challenge. Of course, in the most expensive areas. You had a surge in inventory when compared to last year. But then overall, you look at the US housing market inventory is well below where it was before the pandemic. So the path to normal is really really slow, but buyers are ready to go and that I think that was to me, that's the most surprising things. The idea that while everybody was screaming yet prices are gonna fall a lot sellers are gonna We're not in that situation where sellers are desperate to sell. I lean on a interesting fact that I saw on realtors that reveal to the shared midway through 2022. Today 1% of realtors are working with distressed seller compared to 49% before the global financial crisis, right so sellers are not desperate to sell. And so we need if we're going to get that inventory that uptaking housing market activity we're going to need those homes that are under construction to come back on the market.

Mike Simonsen 19:35

Yeah, yeah. The the summer so much so many threads in there that I want to pull on. But the the one one question that pops up so is are you finding insight in the Zillow, the massive Zillow sphere that you weren't able to get in, in previous work or academia? Like I there's some fun things in there that you're finding

Dr. Orphe Divounguy 19:59

out is absolutely all having access to every house on an on or off the market. The characteristics features are Zestimate the potential features that homebuyers are actually looking for. Right, I think that's phenomenal. Having access to that information at a very granular level down to the zip code at Zillow, we use this term turn on the lights or goal is to turn on the lights to turn on the lights for home buyers, for sellers for realtors, it's to make the home buying and selling process as painless as possible. And of course, that means supporting realtors, and means helping buyers understand mortgage financing and just kind of putting all these pieces together. And so I find that very, very draining some of our social impact work as well as helping at risk renters and helping people that are kind of on the fringe that may not be able to access homeownership and helping them get prepared. So I think that is that is fascinating work and of course coming from a poorer country and having seen kind of people struggle, I think I think working for a company that's focused on helping people access homeownership is exciting to me.

Mike Simonsen 21:08

I bet I bet it as that does sound really terrific. Do you were there the specifics any any specifics and things like features that now you've only been looking at that data for for less than a year, but are there are there trends in features that we can see like home features that you can see in in any of that anything interesting?

Dr. Orphe Divounguy 21:29

Yeah, I mean, like the, in some places, the need for aircon air conditioning, for example, is quite interesting. But But yeah, in this current environment, I think, I think what is what is jumping out is the fact that people are settling for less like in terms of sizes, right? Number of number of bedrooms and, and square footage, people are selling for less, at least during the pandemic and when prices rose so much the cost of space really increased. And so and so you saw people settle for less even, even at the higher end, what was the Million Dollar Listing so we're, you know, people were actually just shrinking their, their, their footprint, really. And so I thought that was really interesting. Another thing that I find interesting is the fact that people are moving to Florida, and that house prices have been sliding since midway this year. And Florida markets are super hot are still so hot. I mean, they're cooling but they're still too hot. I mean, like percent year over year price growth in in places like Tampa and Jacksonville. Right. I find that really, really interesting given of course, the fact that Florida has is is you have all these hurricanes and flooding the idea that potential homebuyers are still going into these areas and that those markets super attractive to a lot of people. Is this kind of surprising to me.

Mike Simonsen 22:50

That's interesting. So yeah, the the the the natural disaster risk seems underpriced to me in Florida and certainly like insurance wise, like it seems like that there is there's still some shakeout to happen in a in a climate changing world. But but the hot Florida market, kind of that's let's talk about that for a second. So So you know, we could see it. We can see it in the Altos data, the Western hot markets, the Phoenix, Austin, Boise, Salt Lake Denver. Those guys all backed way off this year, and notably, the Florida markets backed less off. Do you then is that part of your your the Zillow hottest markets predictions for 2023? I think there's you guys just had something come out there.

Dr. Orphe Divounguy 23:41

Now as our hottest markets are mostly in the Midwest, we we really believe that affordability will really be the driving factor going into 2023. Yep. And that people are people are going to go to places that are relatively more affordable. Yeah. And so. So I think that's probably where we're where we're thinking. But I think that but at least it's something not something I've tested yet. But I think that potentially the Florida phenomenon is, is due to a lack of inventory. You have all these people that are moving there, that that moved there and 2022 I think Florida was the driving most of the domestic migration was at the top of the list. And then you have this climate risk, which actually destroys housing inventory. And so you end up with a situation with supply shocks could actually push prices up if you go back to this interesting research that was done on what happened after Hurricane Katrina and something similar happened and people expected house housing values to decline post Hurricane Katrina and instead, the market there again to home prices actually increased post Hurricane Katrina much faster than the rest of the country. So supply shocks, right so we know house prices, determinants of house prices are on the demand side you have income tax Population unemployment mortgage rates. But on the right, the supply side, you also have geographical constraints, right? There are kind of natural constraints. And then you have manmade constraints, of course, we have policies and zoning laws, etc. And so these natural constraints and of course, you have this climate change element. And so I think that markets that are going to be subjected to mass, the shocks are probably going to see upward pressure on prices, at least in the near term.

Mike Simonsen 25:28

That's an interesting take, like, like climate risk could potentially drive prices higher home prices higher. Now, that's right. Wow, that's okay. And I can I mean, I can see that in California that the fire markets the the Napa is and thing like destroying a lot of homes or Boulder, the fire of a winter ago in the middle of December took out 1000 homes in Boulder, Colorado, and in like, that's a significant change, and doesn't really impact the number of people who want to live there.

Dr. Orphe Divounguy 26:04

That's right, until people start to kind of take this into account, right and start to price that risk. Yeah, then then home values are you there's going to be upward pressure on home values in those markets. 

Mike Simonsen 26:17

And of course, humans can't really price properly risk things like like climate risks. Amorphous long, the long tail kind of risks, waiting, we can't we can't put $1 out at all. That's really fascinated. Yeah, the the, I gotta make some notes here. I love that that thought so the. So let's go back to affordability. And you're in the in the hot markets take. So one thing I've noticed in the Altos data this spring is spring winter is that that we obviously have seen in May, we saw inventory climb in the Western markets, the Austin's and Phoenix, back to 2019 pre pandemic levels, but but much of the Midwest and Northeast is still at that sort of crisis lows. And so we have low inventory there. But we will also didn't have the big run up in prices during the pandemic. Right. So how should we think about affordability and the Midwestern markets?

Dr. Orphe Divounguy 27:23

Yeah, so you're going to have people who want to own a home, and who may not have to stay in the most expensive cities to work, right? We so work from home is here to stay, I think most of the data indicates that people are still moving and staying away from the office. And so, you know, if you combine those factors, you probably have people moving to more relatively more affordable markets. And so if you have very low inventory in some of those markets, that will actually sustain house prices, if you take the country across the country. And so so you have you're going to have some markets that are seeing prices decline a lot home values fall like we Boise and some of these very expensive, Austin, right, very expensive markets, but then you're going to have upward pressure on prices in places that are that are still relatively affordable. And that's why I can take that all together and Zillow, we really don't think we think home prices on values might actually kind of stay flat or forecast is like Okay, maybe we'll stay flat, or we'll see a small decline, not the kind of decline nationwide that we saw during the Great Recession, for example. 

Mike Simonsen 28:32

Right, for sure. For sure. The so does Zillow have a view on on home prices? Or do you or Zillow have a view on like a forecast for the year for home prices across the country?

Dr. Orphe Divounguy 28:43

Yeah, that's it, we think it's going to be we're going to be relatively flat or start to see a small decline. I can't think of that number off the top of my head. But the decline I personally thought that even when the argument started, the discussion started about whether the prices were going to fall like 20% 25%. And my my thought exercise was, you know, what part of the prices today or supported by fundamentals? Right. And and how much of the of the higher prices relative to what we think fundamental support? Right. And so I my personal take is I think the prices might have gone up by 10/5, five to 10%, maybe right and so over what fundamentals would support and so i don't i It's hard for me to reconcile predictions of 20% 25% the price decline. It's, and I mentioned this to you in our in our social media conversations.

Mike Simonsen 29:37

Yeah. Well, that's that's and I appreciate that and it's it's 25% is across the board is pretty, pretty significant. You have to have a pretty bearish view on a bunch of factors to get there. But I did actually introduce one thing that that I want to ask about. So you mentioned the debt ceiling, as a as a shock that could get thrown into this system pretty soon. Like, yeah, next few months. So you wrote about this recently. Tell me about like, Should I be worried about the debts?

Dr. Orphe Divounguy 30:12

Yeah, I don't think I don't think the US will ever default really, at least not this year anyway, but but just the tension or the delay in addressing this issue. We sold that back in 2011, with President Obama back then, and Republican Congress, and this delay actually had a had an effect on borrowing cost across the US. And we start to see the economy kind of slowed down as a result. And so So I think this is something that this is one of those men made, things we could be avoiding. Right, we could actually address this issue right away. Make sure that there's no uncertainty, there's already enough uncertainty right now for investors. Adding on to to investors fears right now is not a good idea, because higher borrowing costs could actually have pushed the US economy into into contraction territory. I think there's an interesting study that was done by Moody's maybe last year that showed that basically a something like that could actually push the unemployment rate. And really a few people have been talking about the recession, I think this is the thing that could actually push us into recession territory.

Mike Simonsen 31:18

That's fascinating. And I'm going to start paying more attention to it. It is vaguely in my mind with a bunch of political stuff that I tried to keep the volume down low enough in here to keep my stress levels down. Right. But but it's something that is a factor that we should pay attention to, because one of the things in my work is that that we were trying to measure what's going on right now. And people tend to, especially on Twitter, they like to read that and say, but there's all these other things in the future that could happen. And therefore, I have this opinion on the world. And And my view is like, yes, when that happens, we'll measure that. And we'll report on that too. But there are I'm I'm often taken by surprise by events that I didn't didn't plan for. I didn't expect expected mortgage rates to go up in 2022. But seven and a half. I did not expect. That's so so and so like, do you have and this may be beyond the scope of what you wrote about. But do you have any magnitude on borrowing costs that you would expect? Like if we get if it starts to get really down to the wire?

Dr. Orphe Divounguy 32:25

Yeah, no, I don't have a magnitude I didn't. I just looked at what happened in 2011. And, and really, like we saw what happened to the housing market when the mortgage rates shot up above 7%. Right. And so we should really be worried about that as as a potential threat to to the housing market in 2023. And so yeah, that's that's kind of why I started thinking about it a little bit more, because the market seems to be headed headed into that spring season. And things seem to be moving, at least from a buyer's perspective. Of course, we still need those units to come on the market, and most market and most US markets, but that could throw an extra another issue and to deal with right for buyers and pull them back. And so and so that's something that but also right. So higher borrowing costs mean cost to businesses. So far, we're seeing layoffs remaining fairly low. But you know, higher costs for businesses could mean right, we're already seeing less hiring, but then also potential layoffs. And then we see the unemployment rate shoot up, which could really change the picture in the housing market, right, because so right now we have homeowners on very good financial footing, with good credit, better credit than we had the last time that we saw housing market softness, and the labor markets holding, if you throw a wrench into that mix, and all of a sudden you start to see a job losses and higher rate higher mortgage rates, there is no telling what would happen in terms of you know, homeowners actually having to list their homes because of an income shock, which is completely avoidable right now.

Mike Simonsen 34:04

Yeah. Wow. That's, that's really fascinating. Are there other things in the media, the headlines or the zeitgeist that you think are wrong? Now?

Dr. Orphe Divounguy 34:17

Yeah, absolutely. I, by the way, pay a lot of attention. I probably shouldn't. But I do anyway. I pay a lot of attention to some of these podcasts out there. The the pundits on YouTube and and it's crazy what you see out there, right. So you have people who are there's this guy, I won't name his name, but he goes around these construction sites. And he says, hey, look, no one's living here. People are running out. They're not they're not. They're getting rid of their homes. They can't right. And it's a little bit like what you saw before the global financial crisis where there was a serious problem, right? People were leaving their homes because they couldn't afford the mortgage payments anymore. Today, we know that that's not true. There are a few distressed sellers out there. There's a high Share of low fixed rate outstanding mortgages, homeowners on better financial footing and with better credit, the labour markets holding up well, two weeks ago, we talked, we were talking about a recession. Now we're talking about avoiding a recession, because of how resilient households and US consumers are. And so the idea that, you know, the today's price correction is could be caused by people not being able to afford their mortgage payments is just completely crazy. The reality is affordability challenges, because a lot of people were buying homes, or the reason why buyers have now pulled back, right, a lot of people were buying homes prices rose a lot more prices of everything increased, which is why we reached inflation that had not been seen in 40 years. And so the Fed had to bring this back a little bit by raising rates. So affordability is the challenge. It's not the price correction that we're seeing in some markets is not due to people abandoning their homes, because they can't afford the mortgage payments. So I think this is the thing that I see a lot out there that I tried to correct the narrative on, right, what's causing the pullback is the affordability challenges. It's not homeowners not being able to afford their mortgage payments, we the data is very clear you listings are down existing home, homeowners are not listing their homes, they're pulling back, they're pulling back because they're locked into these low 2.75%. My neighbor's mortgage rate, right, lower mortgage payment, he's not going to trade it for the 6.6 point 1% mortgage rate today, you know,

Mike Simonsen 36:30

yeah, well, and of course, correcting the narrative, that's a, that's a quite a quixotic task to, to to do correctly. That's because man, those, those YouTube channels get orders of magnitude more attention. That's right, then those of us who are just like, we're just trying to look at the actual data. So that's quite a task. But but so they, some of those guys, some of those guys are nuts, but some of those guys have, there's some real there's some, there's some real fears in there, there's some real fears the Fed was buying the mortgage backed securities and keeping mortgage rates low for a long time, that is a de last decade phenomenon. And didn't happen before that. And now it's going away. Now, do some of those things, some of the some of the underlying grand fears of a big regime shift in the Fed, for example, do did those have any merit? Like Should we be worried about it for not just maybe 2023? But like, the next decade?

Dr. Orphe Divounguy 37:39

Yeah, I think I think people need to print the mind the fact that the Fed has a dual mandate, and that the Fed will never let the US economy crash because of its dual mandate, right. So the dual mandate is right price stability, but also keeping the unemployment rate in check. So so it's a very difficult task, but the Fed will not do things in a way that causes to, you know, crash or dysfunction in, in, in financial markets.

Mike Simonsen 38:10

So you have you have sort of confidence that that the unwinding happens that we will not, it'll not be disruptive, unwinding quantitative tightening.

Dr. Orphe Divounguy 38:23

Absolutely. Okay.

Mike Simonsen 38:25

Well, that's good. I'd like to hear some some reassurance in there, because there's like a part of me that, that fears, like all of our assumptions about home prices, and affordability and mortgage rates have been built, built on a set of assumptions that are no longer true.

Dr. Orphe Divounguy 38:40

Yeah, investors are showing you exactly what happens when when the market expects a recession. Right. So a recession actually means mortgage rates could fall even more. And so So I so I'm not one of them. I'm not afraid of the small of a small correction, because I know that a small correction could result in affordability improve even even more, and, and people. And of course, we know that because there's still a lot of job openings out there, that and layoffs are lower than they were even before the pandemic, that they've still be in mind actually, housing market activity, going back to some of what we started with, in terms of trading delays, the idea that there were, there were lots of people in the market, and that demographic factors might be playing a role into why we saw the surge in demand during the pandemic. And, of course, that a lot of people wanted to buy a home. They just couldn't do that anymore means that there's a lot of people that that will be ready or wanting to take advantage of falling mortgage rates to come back in the market because they need more space because they're working from home because they have they started a family and they were bailed out by you know, in the market during the pandemic.

Mike Simonsen 39:58

Yeah, yes, for sure. Right, that kind of transitions us into the one thing I like to ask all my guests is, is that the longer term future, the term longer term future for housing, thinking about demographics in our construction and all of the factors. What do you see in for the few years decades? Are there? Are there big ideas that that we should be paying attention to big trends?

Dr. Orphe Divounguy 40:25

Yeah, going into the future, I worry about builders pulling back so much right housing starts, housing starts to fail a lot in 2022. And so builders are pulling back in an environment where I think we still need housing, especially if you have some cities where the housing unit deficit is fast. And so I think that could be a challenge for the housing market. And going forward, we look at inventory right now. And we both we look at the data and say, inventory is so low, even if you bring on all these new constructions that are being built or add these new homes that are being built right now, that might not be enough. And so I think I think we still somewhat under built and then I also worry about the types of units like that we're building like, what price points, right, a lot of families in the United States that are doubling up, they're living with other families, either in rented housing or in owner occupied housing. A lot of these families have on average lower income than the median family in the United States. And so these people will need affordable housing, not just any house, right, any old house, they will need affordable housing. And so proving productivity in the construction sector, maybe deregulating somewhat in order to bring build a cost lower is going to help us put more affordable units on the market for those families.

Mike Simonsen 41:47

Yeah, it has been it has become significantly more difficult over the last decade to to build entry level housing profitably. Yeah, we have we're in a world right now where we've had big inflation on building costs. We've had labour cost inflation, we've had restricted immigration. So our labour pool for home construction is low. Is there any sign? Are there any I don't know if you've paid attention, like have you seen any signs of regulation changing to help us maybe build better some of those things?

Dr. Orphe Divounguy 42:26

Look, I'm optimistic on the not so much on the regulator on the regulatory side. So many of us are working on this even at Zillow as well, our government relations team just to try to talk to lawmakers about the problems, the challenges that we're facing on the regulatory front. But I'm excited about the technology like prefab modular homes, prefab homes, 3d Pro home printing container homes barndominiums I'm really excited about like the shifts that we're seeing and where this could go. Right. It's the technology might actually get us there faster than than the regulators.

Mike Simonsen 43:03

Oh, well, isn't that sort of excellence, tech company, Silicon Valley, Seattle, attitude, the technology techno optimists, right, we get to we get to tech technology gets to save our world. And it's actually an interesting thing to tie in all the way back to our initial part of the conversation in the trading delay. The the technology shrinking the the trading delay in housing. Do you do you the technology is solving some of the the the affordability problems, but also maybe some of the trading delay problems? Have you? Have you seen things in there that that catch your attention?

Dr. Orphe Divounguy 43:40

Yeah, look, I think it's a wonderful thing, right? Like you asked people where they find their jobs, they find their jobs on LinkedIn. Right? Do you remember the days when you actually had to, like, take your CV and walk door to door and ask people like, Hey, Tom available? Can you know, alright, you have to go through the yellow pages and, and kind of go from business to business to look for a job. It's a beautiful thing that we have hundreds of millions of visitors that go on the website and and they look at housing, whether it's for sale inventory, or rental inventory, and they're able to see quickly, hey, here's what I can afford. We have an affordability calculator, here's what I can afford, oh, we can put you in touch of a realtor, right an agent to help you out the soar through your options, right? Being able to do this so quickly. Of course, the mortgage space is very complex, either for anybody who's ever bought a house, even for me, it's really, really hard like, right, like, Okay, well, now we have the two to one rate by down like, what does that mean? What does that do to my closing costs? Who's paying this stuff I looked at recently, the National Survey of mortgage originations and you look at the number the percentage of people who actually know about their how much money they'll need as a downpayment, and or even closing costs. Most people aren't sure We're about what their mortgage payment down payment should be, or what their closing costs are going to be. And so they come to the table completely unsure, unprepared for that journey, right? It's a complex journey. And I'm excited to see that Zillow is really focused on trying to smooth out this process and remove the complexity from the home buying process.

Mike Simonsen 45:24

I love it, that's an excellent place to to put a bow on it for our conversation, or if is really been a terrific discussion. I really appreciate your your your depth with the numbers and your take on the year and, and the broader economy. Like it's really, really informative for me. So I appreciate it very much.

Dr. Orphe Divounguy 45:42

Thanks. Thanks for having me anytime, like,

Mike Simonsen 45:44

and so where do people find you? Twitter, LinkedIn, what's actually

Dr. Orphe Divounguy 45:50

LinkedIn? But yeah, check out our website, Zillow research, right? Google's Zillow risk research, you can find all of our work or commentary. Yeah. And of course, I always encourage people to follow me on LinkedIn, go and ask me any question. Right. And we can, we could chat to prove it to look at the data and kind of make sense of it.

Mike Simonsen 46:09

That's great. And I can find your debt ceiling article on Zillow research.

Dr. Orphe Divounguy 46:13

That's right. That's right. So every every week, we put out a commentary on rates where mortgage rates are and where and where we think they're headed, and what's driving mortgage rates. And so So I wrote a piece I think last week on what's what was happening in the market at that time, and, and what we expect will be coming out with this debt ceiling. Terrific.

Mike Simonsen 46:34

I'm gonna go I'll go read that for sure. And yeah, definitely follow Orphe on on Twitter and LinkedIn. And in the the, like, it's a great conversation, one of one of my favorites, too, to interact with. So appreciate that. Everybody, this is the Top of Mind podcast, you can like it and and give us a a, a thumbs up on the ratings. Because if you're enjoying it, but if you're enjoying it as much as I do, but I'm really having a good time. So so that's it for today, everybody. Thanks so much, and we'll be back next week.

Outro 47:13

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