Zillow Data Reveals Changing Housing Market Conditions

Zillow has released a whole new month of housing market data, and we find an interesting turn in their forecast compared to just six months ago. Things are changing fast in the housing market, and Zillow's extensive statistics files allow one to zero in on the most interesting trends.

Long-time readers of our blog know that we obtain housing data from numerous sources around the internet to provide a broad, unbiased view of housing market conditions, so if you are new here and think that I'm giving credence to Zillow or its business model, you can be assured that it's "just their turn" in our reporting cycle.

It is difficult to find impartial, credible sources for analytical data on housing. I turn to Zillow every quarter to see the market from its point of view I will share one great benefit of using Zillow market data is that it is far more timely than most national reporting sites with similar market coverage.

US Home Sales Are Declining

This graph reports Zillow's estimated number of unique properties sold each month.

The blue bars measure the number of homes sold, while the yellow bars report the year-over-year change in sales. When the yellow bars rise about the horizontal axis, unit sales have grown. When the yellow bars fall below the horizontal axis, unit sales have declined.

Sales through July show that for thirteen straight months, home sales have declined in the US. This is non-seasonal information, as each month's change compares to the same month in the year prior. For example, the number of homes sold in July 2022 was 25% fewer than the number of homes sold in July 2021.

The big question this graph raises is, "why are home sales declining?"

Mortgage Interest Rates Are Significantly Higher Than 2021

This graph plots the average 30-year fixed mortgage interest rate since 1971, and the most recent months might shed some light on the decline in home sales.

When I was preparing this graph on August 23rd, I checked the Mortgage News Daily website, and it reported that the current rate was 5.6%, while the one-year-ago rate was 3.03%. The drastic change in mortgage interest rates means that the cost of money for homebuyers has pushed up 85% in just one year!

Rising mortgage interest rates have cooled buyer demand, and remembering the housing collapse in 2006, you might be concerned that the supply of homes for sale is rising out of control.

Inventory Of Homes For Sale Is Still Declining

In this graph, Zillow reports the number of unique listings active in each given month since the beginning of 2019.

The blue field measures the number of listings, while the red line plots the year-over-year change in inventory. Look where the red line crosses the dashed-blue line in 2019, as that is when the market shifted from inventory growth to inventory reduction.

In 2019, the market was already slightly skewed to sellers, as inventory levels were below six months of supply. As time progressed, the supply level worsened, and bidding wars among buyers became the norm.

The 2019 inventories were roughly 600,000+ homes too few, yet homebuilder production did not step up to fill in the void. So rather than see rising inventories accompany rising mortgage interest rates, we've experienced the opposite effect.

The inventory decline is not so apparent to people who do not track market behavior regularly. With builders representing less than 10% of today's current inventory (compared to the 20+% in 2006), the existing homes inventory has greater control of the growth or decline of inventory levels.

Today, when a buyer opts out of the market due to affordability, it often is a buyer who would also have a home to sell. Thus a buyer leaving the market results in a seller leaving the market in roughly 50% of the cases. The move-up and move-down buyers have slowed, so inventory growth has slowed too.

Median Home List Price Is Rising

This next graph plots the median prices at which homes across the US were listed and sold.

The blue field in the graph shows the median list price, while the red line shows Zillow's estimate of the median home sales price during the same time period.

The blue field shows the seasonal pattern on the median list price, with prices starting low at the beginning of the year, moving higher during the summer, and then falling slightly towards the end of the year. The median sales price does not move similarly.

I believe this graph reveals two things. First, home prices generally rise, so it makes sense that end-of-year asking prices are higher than at the beginning of the year. Second, sellers who tried too high of an asking price earlier in the year end up dropping their prices to get sold before the end of the year. Remember, a homeowner can ask any price they like, but to get sold, they have to meet the market at the right price.

The red line shows that there is no actual inner-year cycle for prices, they just generally rise. The red line has been rising faster of late, but I think the declining number of sales will flatten it out to where prices are growing at more "normal" rates (the average home price growth over the past 80 years is 5.2%).

US Home Price Growth Has Cooled

This graph is Zillow's take on the median home price, measuring the typical home value for single-family homes, condominiums, and co-ops, including market changes across the United States. It reflects the typical value of homes in the 35th to 65th percentile. In other words, it approximates the median by swiping the middle-third of the market and analyzing it over time.

If you look closely at this graph, you'll see that Zillow has reported home values from 2000 through July of next year because their dataset includes past data plus a forecast that home values will rise 2.7% over the next twelve months. Just as a reference to how conservative Zillow's estimate has become, it estimated 17.3% annual growth back in January (six months prior).

Zillow’s Home Value Index provides a great perspective on the toxic decline in home affordability. When we compare the slope of price growth over the past two years to the slope of price growth during the housing bubble, it is an alarming image.

One must remember that the supply and demand dynamic for homes is the key driver of home prices. Today's sub-3 months of supply of homes has caused home prices to soar, and as we will see in our next graph, it is doing the same for rental rates.

Double-Digit Growth For US Home Rental Rates

The final graph in today's Zillow Housing Report explains why there is no housing bubble and that conditions are even worse than the bubble of 2006. It measures what Zillow refers to as the "typical observed market rental rate" and, like the previous graph, takes a swipe from the middle of market rents to approximate the median rental rate over time.

The blue area measures the rental rate index each month (median rent), while the red line plots the year-over-year percentage change each month. It is this red line that is alarming.

As the inventory of homes for sale has declined, so has the inventory of homes for rent. People who must move today have no good choice between buying versus renting a home. The cost for each has exploded.

In July, the median rental rate of $2,031 was more than 13% higher than the median rental rate of $1,794 recorded in July 2021. Can you imagine if your monthly rent was increased from $1,800 to over $2,000 per month? If the rate remains the same over the next year, the median unit will rent for $2,300 per month, a rent hike of more than $500 monthly in just two years!

I often receive comments from viewers on our YouTube Channel saying they are waiting for home prices to fall. I certainly understand the feeling, but I have to wonder, where are they living while waiting? Are they waiting in a home they own (meaning if their assumption is correct, their home price will fall too), or are they waiting in a rental property where their lease renewal will hurt?

The Takeaway From Zillow's Housing Update

The previous graph is the smoking gun that lets us know just how troubled the housing market has become. When people get priced out of the "for sale" market, they no longer can turn to the "for rent" market, as they will be priced out of that too!

Most people do not realize that when home prices crashed after the housing bubble, rents kept moving higher. That was a sign that we did not interpret correctly, as it was a signal that despite the large inventory of homes for sale, there were not enough homes built in America.

The plummeting demand that caused the inventory imbalance was caused by government involvement that took away loan options for nearly all but the wealthiest of borrowers. Loan qualification standards were pushed far higher than ever in the past by a government intent on slowing a perceived "out of control" housing market.

Since the bubble burst, we have seen a significant slowdown in the number of residential units built to house our growing population. Unfortunately, inflation has pushed the cost of new construction to a level where the median home buyer cannot be served.

The more that I read, and the more that I study housing data from various sources, the more I am convinced we are rapidly heading towards a renter nation. In an industry where there has never been centralized control of home prices and rental rates, we'll begin to see both dictated by Wall Street giants which will consume much of the inventory in the future.

If you feel like I'm overreacting or you have ideas for a different outcome, I welcome your comments below.