Zillow’s Take on the 2025 Housing Market

Mike Simonsen here. Thanks for joining me today. Welcome to the Top of Mind podcast. If you follow along with Altos Research, you're familiar with our weekly real estate market video series with the top of Mind podcast. We seek to add context to the discussion about what's happening in the market from leaders in the industry 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 the insights available to you before you see it in the traditional channels. People really need to know what's happening in the housing market right now. So if you need to understand the housing market or communicate about this market, go to altos research.com and book free. Consult with our team. We'll talk about your local data and teach you how to use market data in your business. But speaking of data and informing your clients, I have a terrific guest today, Dr. Orfe.

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I know I'm negative about. That's great. You got it right the first time. Okay. Or Orfe is a senior economist with Zillow's economic research team. His work has been all over the big publications like the Wall Street Journals business, the Hill. He's great on TV too, as you can see. And when people really need to understand the housing economy, ORFE is actually one of my favorite follows for housing and economic analysis and social media, not just with Zillow data, but for the broader economy. This is his second time with me here on the Top of Mind podcast. It's been two years almost to the day and what a wild two years it's been. So Orfe, welcome back.

Thanks for having me, Mike. It's always a pleasure man, and I follow your work too. So I love everything you guys put out and I think of all of every time I see something in the housing market and usually before I even look in our data, it's usually one of your headlines. I'm like, hold on a second, is Mike seeing something that I need to go check out?

It's really nice to be able to corroborate back and forth, is this actually happening? Let me make sure. Well, so great. It's great to have you here and I love your perspective on things in the economy. So what I thought we'd do, it been, I looked, it was like January 22, 2 years ago. It was almost two years to the day. It's the end of January. We're recording this. So let's start with the retrospective. I went back and reviewed that interview two years ago and one of the things we were discussing was recession risk. That's right. The thing that we were top of mind was like, are we going into recession? What's going to happen? So it obviously didn't happen recession. So give me the take on the last two years and how that sets us up for now.

That's right. I mean we came off, it was, if I remember correctly, it was January, 2023 and we had just experienced this record increase in interest rate. The Fed had acted so strongly starting in mid 2022 to raise interest rates and try to reign in inflation. And so the recession risk was, I think every shop was forecasting a potential recession. House prices were declining and then all of a sudden despite all that noise we avoided, we normally avoided a recession, but we also got a big rebound in house prices. So after that period, but it kind of makes sense in retrospect like strong labor earnings, a strong labor market supporting households, a massive savings buffer supporting households. The stock market soared during the pandemic supporting a big increase in household financial wealth. And then you also had low mortgage rates. Low mortgage rates allowed households to take advantage of what we call at Zillow, the leverage of a lifetime reducing their biggest monthly cost.

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Most of my neighbors have mortgage rates are like 2.4, 2.5%, and so they have this super low monthly payment, homeowners able to save thousands of dollars, but also at the same time seeing their home equity soar during the pandemic. And of course research tells us that homeowners tend to spend five to 8 cents out of every additional dollar and housing wealth. And so the increase in financial wealth, the increase in housing wealth, the strong labor market really continued to support consumer spending, the bulk of the US economy. And so of course acting as a big buffer and shielding households from higher interest rates from the interest rates hikes that we got from the Fed.

So that's an interesting stat how we spend our housing wealth. You said it's five to 8%,

Five to 8 cents, five to 8 cents on every dollar additional dollar of housing wealth. And you think about the soaring home equity that we saw during the pandemic, then you add of course stock market, stock markets actually sort during the pandemic,

All the other wealth.

That's the other wealth, right? So according to the Fed, US households have a net worth as of Q3 of 2024 had a net worth of $169 trillion compared to just one 14 in 2019 before the pandemic. So you've got a massive increase in wealth that took place in the middle of a global pandemic. So that's the unexpected. I think that's the part that we really remember, 2020 March, 2020 when everything shut down, I don't think anyone thought that we'd see that kind of increase in housing wealth and financial wealth that we saw.

And as you say, in retrospect it seems, well of course we didn't have a recession because we had a lot of cash and we all had jobs and things, but man, it's hard to see and it's obviously hard to see

When you're in the middle of it,

Right? Right in the middle of it. And for everybody there, I think there were some of the folks I suppose who maybe held out and said we weren't going to have a recession were folks who were very focused on the labor market at the time and they're like, unemployment's really low and it has not moved yet.

We had a record excess number of job openings. It was like the buffer was massive, but of course we talk about this, but there's still the fact that of course not everyone benefited, especially I want to say especially younger, lower income renter households. The people that didn't really necessarily were able to access the housing market didn't have access to maybe the down payment or closing costs necessary to access housing people that maybe were priced out or even just bid out when the housing market was on fire. And so if you were a lower income renter household, you did not see that kind of increase in wealth that most Americans actually saw during the pandemic. And so I think it's important to mention that we had, you hear everybody talking about a kha recovery, it's in fact that some people at the top got really, really wealthy and then people at the bottom just barely got by.

Yeah. And so what does that mean for now? Is there any recession risk now as we look at 2025 and what is the K shape? Kha recovery mean? Those folks at the bottom that didn't get the wealth, they're still locked out of the housing market. So what does it mean for 2025?

Yeah, look, our baseline scenario is that probably we're not going to go into a recession this year, but I am concerned, I think I'm concerned about the labor market, the labor market being frozen. So you have, while layoffs remain really low, hiring rates are lower than normal. Job openings are at 9% lower than they were a year ago. The hiring rate has dropped to about 3.3% the lowest in more than a decade. People are not leaving their jobs anymore. They were, when the labor market was on fire, we went from the great resignation to the great stay. The quit rate has fallen below 2%, so workers are staying put, which tells you that basically they don't think there's a whole lot of opportunity out there. And of course, fewer job to job transitions, it means lower wage growth and so inflation likely going to continue to ease.

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And so I worry that the labor market's really on the edge and maybe the strength that we're seeing right now is somewhat overstated. The other thing I would worry about a little bit is I saw report recently that showed the corporate bankruptcies were at a 14 year high. I think the higher for longer interest rate environment could put a little pressure, could put some pressure on businesses, especially small businesses that rely on debt financing that were maybe looking for the opportunity to refinance their debt at a lower rate and yields have remained elevated. And of course that means borrow costs remain high. And so if your cost of debt is elevated, you're not expanding your operation and you potentially could even cut workers if things get tighter. And so that's what I worry about. I worry about the labor market. I think the labor market is perhaps not as strong as the latest employment numbers suggest.

Yeah, so you brought up a couple of points in there that I hadn't previously thought about. Corporate bankruptcies at 14 year high and it makes sense as you pointed out, cost of money is very expensive and some of those folks have been hanging on for a few years but now can't refinance or can't make the debt payments is 14 years ago. It was that high. In historical terms, is it a lot of corporate bankruptcies or is it just high because we've had a really strong decade?

Yeah, well we didn't have a strong decade. You could say maybe the recovery started 20 16, 20 17, right. So yeah, I mean I think it's a number to keep watching out for to keep in mind how are businesses, especially smaller businesses doing tracking maybe small business business confidence. The NFIB has their survey they put out every month. So just tracking the stuff I think is really important and not just relying on one data point. So we look at that jobs report every month and people just focus on the headline employment growth number. And I would say let's make sure we look at everything to kind of keep track of everyth. So most recessions come from shocks. They're shocks and shocks by definition are basically things that are unexpected. And so making sure we have a full picture of what's going on is going to prevent this kind of surprise. Yeah,

Yeah, and that's an interesting way to look at it. I've talked here on this podcast and in other places about the great stay and how the parallels of the labor market where we're not hiring because we've got workers, we're not quitting because I've got a good gig and that parallels the housing market where I'm not leaving my mortgage, I've got a good mortgage, I'm not moving across the country because I don't want to quit my job. So both of those in the great stay are happening together.

Exactly. You said, because I don't want to quit my job. I mean, is it because you don't want to quit your job or is it because there's just no opportunity out there, right, with hiring rates falling so much, maybe you're stuck in your job. I dunno. Right, but the point is that ultimately when the labor market cools down, if mobility in the labor market slows, residential mobility also slows. When you look at the current population survey, the top reasons people move are usually jobs. The labor market first housing happens to be a second reason people move maybe more inventory, more affordable housing somewhere else. And so if the labor market is so tied to residential mobility and the labor market really cools down and people are not moving from job to job or maybe even not getting raises in their jobs, chances are you'll see less mobility in the housing market as well.

Yeah, which we're seeing. You also mentioned in there something I wasn't familiar with, which is lower wage growth. Is that underway right now?

Yeah, wage growth is still about 3.9%, but it's come down, right? It's come down substantially during the past couple of years. Part of the reason wage growth hasn't come down more, much more is because we've had this productivity increase. Productivity growth is slightly above 2% right now, which is, it's a wonderful thing if you think of wages as a function of productivity, growth and inflation, the fact that productivity is at 2% means inflation's probably below 2% and wages are 3.9%. It means inflation's probably underlying inflation is probably lower than the headline figures show right now, which is why I still believe that given everything I see about the labor market, the fact the labor market's somewhat frozen and that productivity growth has been pretty strong. It tells me inflation's probably easing is going to probably ease further next year absent maybe any mishaps coming from Washington dc I think inflation's going to continue to moderate. I hope we're going to see treasury yields continue to ease, especially in the second half of this year. And so of course when people ask me Where do you think mortgage rates ahead? I think mortgage rates are headed lower. They're not going to fall at ton. We still expect rates to stay above 6% in 2025, but I think they're going to come down somewhat from where they are right now.

So I do want to get into mortgage rates, but I want one more question on the wage growth because wage growth is important in the housing context from an affordability standpoint because even if home prices don't fall, if they stay flat over time, but wages continue to grow, we get slowly more affordable homes. As you look at the second half of the decade, do you see wage growth? Is that a scenario that feels like we might gain some affordability, traction back through wage

Growth? If you want housing to be affordable, like you said, I think you need a strong economy that isn't inflationary and the only way to get that is with strong productivity growth. And so I think we've had some kind of good news on that front, which is what I alluded to briefly. We've had strong productivity readings and ultimately if we can sustain that, then I think housing will get affordable over the course of the second half of the decade

If we're able to maintain. So productivity has been strong and positive, and if we're able to maintain that, then that scenario for improving affordability is one that is certainly in the realm

Very much in the cards. I guess the next question is how do we get this productivity improvement? How do we sustain that at the very least, right? On the policy front, it's a deregulation, it's a, if we can deregulate the housing market, for example, starting with builders, allowing builders to build more housing to build more, and I'll take the very good example. I wrote about this in 2022 when mortgage rates soared and affordability really got strained builders started building more attached taller as opposed to detached single family housing, land use restrictions and zoning rules prevent builders from adjusting to changes in housing demand. It actually impedes productivity in the construction sector. And so allowing builders to adapt to market conditions is going to help bring down the cost of housing, make housing more affordable. And so that's why I think if on a policy front, if we can continue to move towards less regulations, we're going to see productivity in the construction sector.

Okay, well that's a fairly optimistic take. I appreciate that. That's good. It's nice to have coming into,

I'm not saying it's going to happen, right? I'm not saying it's going to happen, but I'm reassured. I'll tell you why I'm reassured, I'm reassured because affordability is not top of mind across the country. We see it in the headlines everywhere. That's what everybody's talking about. And so as more and more people talk about housing affordability, you start to see consumers demand it. You start to see politicians start to talk about it, and if politicians are talking about it and are feeling the pressure, I think we're probably going to see more change, more positive change things going in the right direction.

Yeah, I've been optimistic about that too at the national level. It's like finally the right conversations are starting to take place and that leaves me a little more optimistic. Okay, so that's great. You mentioned a little optimism on mortgage rates, so let's talk mortgage rates for a few minutes, and so it's late January and suddenly we're over 7% on the 30 year fixed. What's your take for the year? I don't think Zillow has an official forecast for mortgage rates. You

We do, we do. I don't think we come out, I don't know if we have it publicly made public, but it informs a lot of our

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Forecasting for sales prices. So we do have a mortgage rate forecast and ultimately we think mortgage rates will ease somewhat over the course of 2025, but we're not returning, I think people don't like to hear this, but we're not returning to sub 6% mortgage rates anytime soon. So we really expect rates will continue to ease but will remain above 6%, at least in 2025, and that will likely be true so long as you don't get big surprises on the policy front in dc. Right. Fiscal deficits being top of mind also people are concerned about fiscal deficits. 7% of GDP in peace times is quite high. That's going to be a risk to our forecast. But ultimately for the reason I highlighted before, if inflation continues to moderate, you continue to see strong productivity growth. There's no reason why the 10 year treasury yield wouldn't ease somewhat from here if the labor market remains in decent shape, right?

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It doesn't deteriorate further and you don't see a big uptick in the unemployment rate, then the spread between the 10 year yield and more s will not increase all that much either. So I think we're good. I think we should see some easing, some stability. Of course in the first a hundred days of any administration, you tend to see a lot of volatility because of announcements of different things. So we might still have some volatility at the start of this year, but things should settle down, should hopefully settle down towards the end of the second half of this year.

Do you see any scenario where maybe via combination of well-timed lucky economic news and maybe a compression of spreads between the tenure and the third year, do you see maybe any scenario where the 10 year dips low enough and the spread dips low enough that in 25 that we see a moment that dips under 6% for the 30 year fixed?

I mean look, anything's possible, but if you look at mortgage rates in the 10 year right now, they've basically been, they followed each other very closely. The spread has been somewhat constant. It's come down a lot from a couple of years ago, but it's been somewhat constant and rates the increase in the term premium that pushed treasury yields higher in the last month or so, while you see it reflected in mortgage rates, mortgages have actually increased almost by the same magnitude as the 10 year yields in the last month or so. I don't think we're going to get a much more action on the spread. I think that we're going to potentially get the 10 year yields easing a little bit and that easing will show up in mortgage rates as well. Can we get five high five mortgage rates, maybe it

Window like a little old wink in there? Yeah, it's hard to imagine.

Of course, very difficult to forecast these things. In fact, we revise the forecast all the time. New things happen, new things change. We get these announcements that kind of cause panic in the markets and you see massive volatility. But ultimately I think we're going in the right direction with the Fed by the way. It's a good thing that we have a fed that's data dependent when faced with higher uncertainty, the Fed waiting to see hard data and judging whether or not by the way, taking all of the data into account, not just one data point, as I mentioned earlier, really important in the decision making process. And so I think we're going to continue to see some easing. I don't subscribe to the notion that inflation will reaccelerate in 2020. I've seen some people talk about potentially the US economy. I highly doubt it given where the labor market is and that's where I'm going to be tracking in the months ahead,

Don't see inflation accelerating. Therefore likely the economic news conspires to bring a 10 year down, which brings the third year down, not so much compression on the spread. So we're likely to stay where, which is slightly elevated over where it's been, but that doesn't seem to be a lever. I think that's a really clear view. I'd appreciate that. For your orientation on the, you mentioned forecast and we're constantly revising forecast, so it's now in the middle of late January and I know in our data home sales are coming in lower now than last year at this time, and each week I'm watching 'em come in lower. Do you have a take on your forecast for home sales total volume for 25 and at what point do you revise those?

I think we've had a recent revision and same I think similar to yours, which is we revised this sales number down. We still think we'll have more sales in 2025 than we had in 2023 and 2024, but because of more of the key input. And so with mortgage rates kind of surprising slightly on the upside, the sales number had to come down a little bit. But yeah, we're still very optimistic that sales will outpace the 2024 number I think partly. And you said yeah, the numbers are slightly lower than we saw at the end of the year, right? In December, I think a couple of things to think about in December. In November, mortgage rates are actually falling. Mortgage are declining in November. If you look at mortgage news daily, you can see the dip in November. They started increasing again at the start of December.

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So a lot of homes that probably were sold in December went under contract in November. And so maybe buyers rushed out and took advantage of that site dip in mortgage rates. At the same time. There's potentially, you could think that if buyers expect collectively, buyers expect mortgage rates to remain elevated or maybe to inch a little bit higher at the start of the year during the spring home shopping season, some of them might say, Hey, I might as well go out in the market right now instead of waiting for rates to increase in the spring. And so potentially some of the activity was pulled forward a little bit. I guess we're going to find out.

Interesting. So you think maybe some of that November, the growth we saw November in the fourth quarter was maybe pulling forward some demand from the first quarter

Potentially. We'll see if that plays out, but I wouldn't be, by the way, I've been looking at housing, not just because I work at Zillow, but I'm always a little bit in the market as well. And so the question for most people is, are rates going to come down? If I've been waiting to move and rates haven't come down a lot, or if I just saw a small uptick in rates and I think maybe rates could continue to arise because that's what I hear about in the news all the time. I might want to rush out and take advantage of the rate where it's at and basically lock in a rate right now, then wait around for rates to be higher. So potentially this could be a reason why we see the slower activity in January than we had at the end of the year.

And I mean certainly at this moment, if you acted in November, that was the wise move,

Right?

So that's a fascinating thing. I don't have a gauge, but I expect that there's a lot of folks out there, consumer folks who assume rates must be going down and therefore are waiting for some action and they keep looking and they keep waiting. So

Well, that group of people were waiting for fed rate cuts, and what they learned is that the fed cut interest rate, but the treasury yield and more rates increased instead.

Yes, they were surprised by that. A lot of people that were surprised by that.

And so I think that was a lesson for a lot of people and hopefully they learned a lesson. You can't time these things, you shouldn't try to time these things. It's very difficult to anticipate where rates are going. And so when you can afford to buy is the right time to step in a housing market. I always say to people, you could refinance later if you love the house and your circumstances are such that you need to move, don't sit around waiting for mortgage rates. Very, very difficult to get it right. Right. Yeah.

Yeah. I think we are well aligned on that. If you love the house and you can afford the house, buy the house. If you don't love it or you can't afford it, don't buy it. That's right. Okay. So anything else in the December market report? The Zillow market report that jumped out that we should know?

No, I think just like you said, I think nothing was too surprising. Inventory is still rising, but probably the rise was probably more slowly than I would've expected. I think it had to do with the fact that maybe activity was a little bit stronger at the end of the year than what I would've expected. But other than that, I think the big surprise is in the rental market maybe we're seeing strong increase in single family rents relative to multifamily rent growth. It's the biggest difference between the two types of units that we've seen in our data. Going back to 2018, the typical single family rental now commends a 20% price premium over a typical apartment. Of course, these things are completely different things, but still, if you track the data over a long time, a period of time, the gap is the largest it's been.

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And so of course we know why. We know that there's been a large increase, five decade high increase in the supply of apartments, apartment buildings. And so of course that has contributed to downward pressure in the multifamily space, but still it's very interesting to keep an eye on. Part of it is also potentially the fact that you have renters are renting for longer and everyone seems to want single family space. If you're an older millennial and you don't own a home and you've been held back by higher mortgage rates, you are forming a family. If you can't buy it, you are renting it. You're renting the single family home. And so perhaps that's also part of the reason you're still seeing that kind of pressure on single family rentals.

That is a fascinating observation. And the Zillow observed rent index, right? ZORI. Yeah, and that's where you're seeing that divergence. So apartments, we had brought a lot of apartments online in the last few years, a lot of apartments around the country. And so we can see it in the price is paid in the Zillow rent index.

That's right, that's right. We also have a nice metric that we publish every month is the number of the share of renters of rentals with a concession rental. Vacancy rates increase, landlords offer concessions to try to fill their units. So we've had on Zillow, which by the way, I think a not a lot of people know this, Zillow is now the largest rental marketplace in the country, but we can see we have a high share. 41% of all rental listings on Zillow now have a concession, which is a record in our data as well. So you're seeing a loose rental market right now, partly because of a lot of units have come online.

So that implies weakness for at least the near term as well. I suppose if there's not enough demand that they're offering concessions. Now that implies weakness in rent growth.

So again, when you say not enough demand, you should probably say not enough demand relative to supply. So if you get a big increase in supply, even holding demand constant, you're going to get a looser rental market. So you get a combination of both. You have maybe a little bit less demand, but a whole lot of supply. And then you basically have a looser rental market. And we also have a measure that tracks this. We call it the Zillow Observe rent demand index, but it's really not a demand index, it's a measure of tightness in a rental market, which I encourage listeners to check out. It's on the zillow.com/research page. We have a data section and you can look up Zdi, Z-O-R-D-I, which is basically our measure rental market tightness. And basically the rental market is less tight than it's been in a long time, partly because of a small decrease in demand, but also big increase in supply in the supply of rental units.

Yeah. Do you have any sense for how far leading that is? How far does that look out? Are we looking at two years or is it like two months?

Interestingly enough, we also internally, we've been looking at this colleague of mine is working on this multifamily forecast, but basically look, all you have to do is look at housing starts and what you see is a big decline in multifamily starts. Builders will get the permit, they'll start the unit, then it goes under construction and then it's completed and it comes on the market. And so a big decline in starts, which we've seen a big decline in starts in the past couple of years. That decline basically tells us that there will be fewer apartments coming on the market and we expect a big drop towards the end of 2025 and the start of 2026, that decrease in supply in the supply of units could potentially basically stop the rise in vacancy rates and rental vacancy rates that we've seen lately.

And you can imagine if you got to finance your apartment, building your building and three years ago the cost of money went up and people stopped building. So now it's about time to get those a few years in to get those finished and suddenly, so that's seeing by the end of this year is maybe our supply glut of apartments starts to wind down and start shifting things around. That'll be a fascinating impact on not just on rents, but also home prices and demand at that time if that changes.

That's right. And I got to say, I personally don't call it a glut. And remember, the reason I don't call it a glut is we keep talking about this massive housing deficit. I would like to continue to see builders building maybe more single family space. Now the good news of course, is if you look at single family construction, it's still above pre pandemic levels. It's come down a little bit in the past couple of years, but it rebounded in 2024 and it's still above pre pandemic levels. I think that's good news, the fact that basically builders are still responding to the need for housing that we have across the country.

Yeah, that is good news and that's a good way to look at it. I appreciate your wisdom on that approach. Let's shift to local markets. The last time we spoke two years ago, one of the things we talked about was how the Midwest markets and northeast markets, the affordable parts of the country were poised to do well. And that was super prescient. That was exactly what happened. Zillow has called, I think Buffalo, the hottest market in the country for two years in a row now, and that was exactly what happened. So let's talk about the local markets now. Is Buffalo in for a third year? What do we got going on?

My advice to most people that don't necessarily do this for a living is just try to focus on the determinants of housing demand and housing supply. So if I look at what drives housing demand, I boil it down to wages, jobs, jobs in the labor market, financial wealth, and so of course save mortgage rates. And so I look at that on the demand side, and you have a place like Buffalo that has, it's considered a college town, big university. It's an interesting market. So you also have a lot of jobs. So people finish college and they get jobs in the area, large student population, and then the jobs also attract new residents. And so you have a lot of factors here that could potentially keep demand elevated on top of that, it's relatively affordable for that area, for that part of the country. And so you have a lot of these factors that are essentially supportive of housing demand. And then when you look at the supply side, the is not known for building a lot of housing.

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The rules, the zoning laws are kind of outdated. They're kind of stringent. And so if you have a lot more demand than you have supply, or at the very least you have sustained housing demand and builders are not able to keep up with that demand for housing, what do you get? Well, you get competition for buyers. You get a tighter market, you get stronger price pressures. And that's why of course Buffalo ends up on that list. Our list hottest markets really measure tightness competition for buyers in the housing market. And ultimately those are markets where buyers where demand is set to continue to outpace supply much more than in other markets across the country. And so that's why Buffalo stays on that list. Essentially. It's one of those markets that where we really would love to see more construction in that market to absorb all of the demand for housing that's in that metro.

I hadn't considered job and wage growth in Buffalo as one of the factors, lemme run my hypothesis by you and tell me if this works for you. We talked earlier about the labor market. Great stay that the fact that we're not quitting jobs and companies aren't hiring jobs, aren't hiring very fast, even though unemployment is low, we're afraid to quit our job and maybe we can't get another job where we need to stay for a long time, we've been moving from Buffalo to Florida or from Buffalo to Dallas, and I quit my job in Buffalo and I get one in Phoenix and that's a good move. But now we are afraid to quit our job. And so we've got a good gig. We've got an affordable house with a cheap mortgage. So for years we've been building in the Sunbelt, not building in Buffalo, but we've been selling in Buffalo and buying in the Sunbelt. So that build. So now we've stopped moving, we've stopped changing jobs, we've stopped moving across the country and therefore we're selling fewer in Buffalo and we're buying fewer in Florida inventory builds in Florida and is tight in Buffalo. So in my view, it's related to the great stay. And I hadn't considered things like income or college town or demographic things there. Tell me what you think about my hypothesis.

Well, I mean if I follow your logic, what happens is we get stuck because we're stuck in the labor market. We're stuck with the current outcomes in the housing market. So basically inventory is up a lot in Florida and remains elevated. People in Buffalo stay in Buffalo, college kids finishing college in Buffalo, stay in Buffalo. And so the pressure remains. And so you see, at least if I follow correctly, then the pressure stays in the high pressure markets right now, whereas the looser markets stay loose. And so it's an interesting, I guess it's an interesting equilibrium. So I don't know, and I am not even sure as I think about this, I'm not sure if it's an equilibrium. And the reason I say that is because as inventory builds up in Florida, maybe there's a level, there's a price and prices continue to ease. In Austin where we see price declines, maybe there's a level inventory in prices that gets people moving back to those markets, into those markets where you have more inventory and lower prices.

(42:39)
So I don't know, I need to continue, I need to think about this a little bit more, but I think what we've learned historically is that people have moved to places that were relatively more affordable than where they came from. When I say affordable, both stronger labor market for income, because of course affordability is we measure affordability as housing costs as a share of income. So both stronger labor market, strong incomes, but also higher, more housing inventory, more options in the housing market. And so I don't know, I think maybe that's where we will end up when this is all said and done is people still moving to markets that are relatively more affordable with a greater mix of housing options and more housing inventory. I think I guess time will tell.

Alright. So you mentioned a couple, you mentioned Austin with home prices declining, is that backward looking done or do you think it is still ongoing in Austin?

I think so according to our latest report, prices were down 3.2% year over year in Austin. The price declines are in markets like Austin, San Antonio, Florida, Tampa, Jacksonville. Those are markets where you had a lot of construction and then a lot of construction. That coupled with, you mentioned it, the cooling labor market, the cooling labor market, that's basically keeping people in place for now. I think once we see mobility of resume to normal, that's when we'll start to see those prices start to increase again.

Yeah, I would agree. So you think that the current conditions look like in those markets that have had price declines year over year to finish 2024 look like they probably haven't found a bottom yet. And this is me saying it, you can confirm, but look like they probably haven't seen a bottom yet because the mobility trends haven't changed. The affordability trends haven't changed. Maybe we get to some point there's a floor on pricing and suddenly Tampa looks cheap again even though insurance is expensive.

Yeah, I mean it's one of those things where, so by the way, I hadn't even taken into account the insurance thing. I think that's a good point. Insurance, it is part of the cost and you'd have to get total cost to decline sufficiently to get people to move back to want to go and buy a house in that market. And of course, and I'm, by the way, I'm working on the piece on this, an article on this, it's not just climate and that people move for various reasons. And so kind of trying to pin down the impact that various factors have, I call them push and pull factors have on these moving decisions is going to really help us figure out what's going to happen to markets like la which of course sadly we've seen massive, the wildfires that took place and maybe are still even ongoing. And then markets where we see massive insurance increases like some of the Florida markets. And so I think that's a very important topic for housing in the next year, really looking at how do these factors influence moving decisions have influenced moving decisions historically, and how should we think about that going forward?

Going forward? So push and pull factors like insurance costs or climate or climate risk. What are some other push and pull factors that you're looking at?

The labor market is number one reason people move. So jobs, it could be that the jobs are so good in some parts of the country and that we love the sun and that we put a premium on ocean views that we continue to move to some of these markets despite the rise in insurance costs at the same time, and I talked about, again, I'm mixing things here. We have income and costs and housing costs that are of the budget constraint. And then you also have preferences like the sun and ocean views that are part of the what economists referred to as the utility function, our preferences. And so I think taking those things into account, we want more sun, we want more access to the ocean and the lakes and the mountains, and at the same time we're constrained by our budgets and our budgets. On the right hand side of the budget constraint is your income and mortgage rates. The cost of insurance goes on the left-hand side of the budget constraint and prices. And so putting that down, nailing that down and quantifying these impacts or the value of these different factors for moving decisions, I think is really, really important. The better we understand how these worked in the past, potentially we'll have a better idea of where things will be headed in the future.

When we talk about things headed in the future, obviously affordability is this overarching sort of crisis that we're under. Do you have a framework or thinking about affordability in general, how we get out of the crisis, what comes next? On the affordability front,

I did a little exercise internally where I said, suppose the world stayed constant, right? Nothing changes in the world, no changes in mortgage rates, nothing. And then you get a big increase in the number of existing homeowners choosing to sell their homes. Even if we had a massive increase in that number of, we call 'em new, we refer to a new listings existing homeowners coming on the market to sell their homes, that would not be enough to get affordability, to get the kind of price declines that we need to get affordability back to say the pre pandemic levels. And so what that tells me is that we really need, we're going to really need more housing supply coming from new homes, new construction. Luckily for us, builders are still building. We see an uptick in new construction and housing starts in 2024. I think that's good news. But ultimately the big lever here is mortgage rates. You want to get affordability, you got to get rates down. But as you know, if you just let rates come down, potentially you get more pressure on the demand side, then you get on the supply side and then you get total homes for sale to actually decrease. Rather they increase. And so I don't see another solution than a continued increase in housing supply by basically making it easier for builders to build housing across the country.

Well, that is a very cogent explanation of where we are and where we need to go. Real quick, I also like to ask about the longer term future. And I've asked a couple of questions about suddenly it's the middle of the decade. So we're looking at the second half of the 2020s. What are the big themes that we should be paying attention to? Probably construction levels. Are there things that as you look out at housing over the second half of the decade, what looms large for you?

Oh, look, population growth, demographics, ultimately we need demand, but we also need supply. I don't think you've had, I can't recall an economy that continues to grow strongly over the long run that has had population declines or a population that is just old and not participating in the labor market. And so having the inflow of workers in the labor force, a sustained increase in labor force participation, more people active, younger, able working age individuals in the labor market is going to be crucial for us to sustain that US exceptionalism that everybody's talking about. Why is the US doing so well relative to the rest of the world? We are doing great. We are getting huge productivity gains relative to everybody else, but we really need to keep up in terms of our labor force. We know we have an aging population. We know that that's been somewhat offset by the surge in immigration that we got in the past couple of years.

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We're going to continue to see productivity growth matched by increases in the labor force. We know for example, also that part of the reason inflation has eased so much over the past couple of years has been this big increase in labor supply. So we've had labor supply increases that have helped bring wage growth lower. And so it's very, very important. So if you really want to think about housing over the long run, the US economy, but also housing over the long run, you got to think about population and demographic factors because they play a huge role into what happens, what's going to happen. They're going to play a huge role into what happens to the US economy, but also the housing market. Let me add one more point. When we think about fiscal deficits being high and potentially rising, an aging population has something to do with that too.

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So if you have older Americans in need of more healthcare, you, it's going to take more government spending to support older Americans. At the same time, if you have a shrinking labor force, well who's going to go ahead and where's the tax revenue going to come from? And so the implications are huge, and I think it's really, really important to keep tracking that in the short run. Of course, if you're just thinking about the end of the decade, you still have a lot of millennials that have been either priced out that by the surge they were outbid during the pandemic, then they got priced out by the surge in mortgage rates. And so there's a lot of people still waiting to move. You have Gen Z, big generation coming after them. And so we're probably going to continue to see a pretty strong pace in the housing market to finish out the decade. But as you stretch further and further out, I think it's going to be crucial that we address our aging population, that we address all of these demographic changes that are taking place right here at home, right here in the us. But also, I mean, you look at the wealthier economies, they're kind of facing a similar situation.

Yeah, you said a lot there. And we won't go into the potentially big changes on things like demographic changes or labor force growth in the next, as we have changed administrations now, but there's a lot of those on the horizon. And so population growth, demographics, watching fiscal deficits, which are already pretty high, and the productivity. So to summarize, I think you said it feels like we have the momentum and the demographics and the elements in place for relatively strong or supported housing markets for the rest of the decade. Beyond that, we will have to think about things like silver tsunamis.

Yeah. Yeah. Well, I mean as long as you have demand for housing, builders will probably continue to build. And so that's why I'm optimistic about the near term. And when I say near term, the end of the decade, you mentioned Silva Tsunami. Yeah. There's this idea that as boomers downside or move on or they'll vacate their current homes, you hear a lot about this massive wealth transfer. And a massive wealth transfer means essentially the recipients will get either a second home or they'll put their homes up for sale in the housing market. And I did some work on this, I just kind of looked at where this is most likely. And when you look at where this most likely, these empty nest households filled with boomers, the large majority of those are concentrated in the Midwest where it's relatively more affordable already. And so they're not on the coast necessarily. And so when we think about this potential silver tsunami, what I think is going to happen is that's not going to make a big dent on the coast in those coastal markets with really, really strong job markets. So New York, for example, San Francisco, San Jose, la, San Diego, where things are really, really expensive.

That's an interesting take. The silver tsunami doesn't help the coast. And in fact, it may be back to our Buffalo discussion where those are the folks who are not leaving Buffalo yet for the last couple of years. And so I'm coming out of college and I have fewer homes to buy because those folks, they've stalled, they've delayed moving to

Florida. That's right, that's right. What's interesting about that is I had looked at the census data sometime last year is when you look at the people who don't have mortgages. So remember we had at the start of 2024, we had a small uptick in the return of sellers. We had some sellers come back in the housing market. So I looked and I was like, okay, well where are these sellers coming from? And what's interesting is that you have boomers who don't have a mortgage are concentrated in these markets. They're in the Midwest, they're in some parts of the Northeast and the Midwest. And so it's going to be interesting to see whether or not these wealthier boomers that don't have a mortgage are not constrained by a mortgage can pretty much do anything they want in today's housing market, whether or not they're going to decide to sell their homes or just pass them on to their kids and whether their kids are going to want to sell those homes or actually use 'em as second homes.

Yes. All right. Well those are many things looming large for us. Orie, it's already been an hour,

Can't believe it.

It's such a great conversation. I really appreciate your thinking, your frameworks, you helping me put things into perspective for the year, your view, the Zillow data, it's really outstanding. I so appreciate your time and your expertise today.

Of course, anytime. I'm happy to come back on the show and we can talk about some of the things I've said. Maybe we do it again a year from now and we talk about my predictions and whether I was right or wrong. Right?

That's right. We'll do it. We don't have to wait two years. We can do it one year. And by the way, you mentioned things like the Zillow Rent Index and the Zillow Rent Demand Index, the ZOR di I. We'll put links in the show notes for those. And alright everybody, this is the top of Mind podcast. I really appreciate your time. And if you enjoy shows like guests like Orie here, I would appreciate a rating like five stars and wherever you get your podcast, that helps other people find us and we're trying to do good work here. So thanks everybody. We'll be back very soon with another guest. And Orie, thank you.

It's a pleasure. Thanks for having me, Mike. See you soon