Zillow Said What? Here's Zillow's End-Of-The-Year Take On Home Sales
Zillow has something to say about the housing market, and it is a message reinforced with data accumulated by its massive real estate marketing machine. It's also supported by data from other sources too.
While many social media commentaries proclaim falling home prices and declining home sales, Zillow's data is clear about what is happening. Zillow is not my only source of data on the housing market, but I like to review its findings each month as Zillow is always quick to report and often months ahead of many other real estate market data portals.
Long-time readers of our blog know that we obtain housing data from numerous sources on the internet to provide a broad, unbiased view of housing market conditions, so if this is your first visit to the Tallahassee Real Estate Blog and think that I'm giving credence to Zillow or its business model, that is not the case, it is just Zillow's turn in our reporting cycle.
Today's Zillow Housing Market Update paints a clear picture that refutes what many mainstream and social media pundits have to say about the real estate market.
Homebuyer Activity Continues To Slow
This graph reports Zillow's estimated number of unique properties sold each month, and it shows a 14-month trend has formed.
The blue bars plot the number of homes sold, while the yellow bars plot the year-over-year change in sales. When the yellow bars rise about the horizontal axis, unit sales grew. When the yellow bars fall below the horizontal axis, unit sales fell.
Sales through October show that for fourteen straight months, home sales declined in the US. Year-over-year sales are an important metric because it removes the influence of seasonality by comparing the same months each year. For example, the number of homes sold in October 2022 was 24% fewer than the number of homes sold in October 2021.
Though this graph only contains data since 2009, it's important to point out that the peak of home sales seen on the graph is far lower than the number of homes that were sold during the housing bubble formation back in 2004 through 2006. I point this out as a reminder to our readers that recent years were not filled with the irrational exuberance that propped up the market more than fifteen years ago.
So why have home sales slowed for fourteen straight months?
Mortgage Interest Rates Impact Home Affordability
This graph plots the average 30-year fixed mortgage interest rate since 1971, where the most recent months shed light on one reason for the decline in home sales.
When I was preparing this graph in early December, I checked the Mortgage News Daily website, and it reported that the current rate was 6.37%, while the one-year-ago rate was 3.25%. Interest rates are nearly double a year ago, but we've seen a 13% decline over the past thirty days.
Rising mortgage interest rates have cooled buyer demand, but can we solely blame the decline in home sales on the rise of mortgage interest rates? Here's something you don't hear from most people reporting on the housing market: Interest rates did not move above 3.3% until January of this year, yet year-over-year home sales started to slide back in September of 2021 (and those sales were fueled by sub-3% mortgage interest rates in August 2021).
Home sales started to slide when mortgage interest rates were at record lows, so we cannot solely blame the current housing market woes on mortgage interest rates. In fact, home sales fell for six straight months where mortgage interest rates were below 4%, so there has to be more to declining home sales than just an increase in mortgage interest rates.
Readers who remember the housing collapse in 2006 might be concerned that the supply of homes for sale is rising out of control. That happened in 2006, as builders were in full production mode while buyers were expelled from the market when the government changed lending requirements. Declining demand and rising supply created the bubble that sent home prices plummeting. Is that what we should expect in 2023?
The next few graphs reveal another primary cause of declining home sales and expose the potential answer for the stability of home prices.
Why The Inventory Of Homes For Sale Is Not Growing
Zillow reports the number of unique listings active in each given month since the beginning of 2019, and what they are reporting is very different than what we saw in 2006.
In the graph above, the blue field plots the number of homes available each month, while the red line measures the year-over-year change in inventory. Look where the red line crosses the dashed-blue line in August 2019 and August 2022, when the market shifted from inventory growth to inventory reduction and then back to inventory growth.
I have seen a lot of discussion about the anticipation of inventory growth. However, the 1% rise in listings is a minuscule amount, considering there were more than four million listings during the housing bubble years, yet today we're barely above one million homes.
Those who expect the inventory to rise rapidly as sales plummet are not accounting for the source of new listings. With new construction inventory far lower than historical norms, we must rely on discretionary sellers to fulfill our inventory needs.
The problem with expecting inventory growth is that most discretionary sellers are discretionary buyers too. When a buyer opts out of the market due to affordability, it also means a discretionary seller is leaving.
Thus a buyer leaving the market results in a seller leaving the market in more than 50% of the cases. The move-up and move-down buyers have slowed, so inventory growth is not as many have anticipated.
Another View Of The Inventory Of Listings
This graph shows a different view of the number of listings over the past four years that sheds light on the volume reduction in inventory.
The black line in the graph above plots the number of listings that entered the market each month this year. Note that there are only (slightly) more listings than last year; the number of homes for sale remains 1% lower than last year, 14% lower than two years ago, and a whopping 36% lower than three years ago. It's important to remember that those years were inventory deficient as well.
Today, the number of listings is far lower than in recent years, and all four years shown were sellers' markets, where the number of listings was far too few for the demand in the market. Demand will have to go far lower to create the supply and demand dynamic that will cause home prices to fall for an extended period. There will be markets with declining home prices because they have declining populations. Still, most US housing markets have a supply void that has slowed buyer activity, even when mortgage interest rates were below 3%.
New Inventory Still Slowing
This graph plots the number of new listings entering the market each month for the past four years, and today is slower than ever.
Even as many national news media report that home prices will crash and burn, we see the inventory drop. The only way we'll see major price declines is for supply to outrace demand, but this graph clearly shows that supply is dropping in line (or even faster) with demand.
As of today, it is safe to report that there is no sign of a growing-supply problem. Instead, the lack of supply will put further pressure on home prices.
Median List Price Cooling
This 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 period.
The blue field shows a 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. I'm seeing reports of "list prices dropping." Of course they are! The median list price falls at this time every year! Where were those reports in each of the last five years when asking prices declined in the latter part of each year?
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 ultimately reduce 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 there is no actual inner-year cycle for prices; home prices generally rise. The median home sales price had been rising faster for the past few years, but the declining number of sales has flattened to where prices are growing at more "normal" rates (the average home price growth over the past 80 years is 5.2% annually).
Additionally, one must remember that with higher rates, home affordability falls. Does the slowing growth rate of the median home price mean that home value growth is receding, or does it mean that buyers are purchasing cheaper homes?
Zillow Expects US Home Price Growth To Slow Down
This graph is Zillow's estimate of the median home price, measuring the typical home price for single-family homes, condominiums, and co-ops in the United States. It reflects the typical price 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 October of next year because their dataset includes past data plus a forecast that home values will rise 1.2% 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 (ten months prior).
Zillow’s Home Value Index provides a great perspective on the toxic decline in home affordability. Zillow estimates the median home price has risen more than 91% since February 2012 (an annual growth rate of 6.3%). When we compare the slope of home price growth over the past two years to the slope of price growth during the housing bubble, it is a disturbing image.
CoreLogic Is More Bullish Than Zillow
While preparing this report, I found the graph above on Twitter and added it for perspective. Corelogic believes home prices will grow by more than 4% over the next year, a level greater than three times the Zillow forecast.
One must remember that the supply and demand dynamic for homes is the key driver for the change in home prices. Today's abysmally low supply of homes has caused home prices to soar, and as we will see in our next graph, home prices are growing in 99.7% of the markets in Zillow's report.
Year-Over-Year Home Price Growth Continues
With so many people claiming (or perhaps hoping for) falling home prices, I'm wondering if they are even monitoring what is going on across the US. This graph reports all metropolitan markets where the year-over-year change in home prices grew by 25% or more!
Of the 893 cities reported by Zillow, 890 posted growth in home prices for the past twelve months. Only three markets reported declines:
- Boise City, ID Down 3.2%
- Fairbanks, AK Down 6.8%
- Minot, ND Down 8.1%
Overall, Zillow reports the year-over-year home price in the US has risen 13.5% since October 2021, but I'm sure some of our readers will want to say, "that's not what I'm hearing elsewhere," so let's dig a little deeper into why we're seeing so many reports of falling home prices.
Month-Over-Month Home Prices Growing In Two-Thirds Of US Markets
This graph reports the US markets where the month-over-month change in home prices was the highest.
Of the 893 cities reported by Zillow, 761 (85.2%) posted growth in home prices for the past month, while 132 markets (14.8%) reported declines. Perhaps this is why we're inundated with reports of declining home prices.
If you have seen some of my recent reports on US home prices, then you know that it is common for the median home price to stagger step higher throughout the year (or stagger step lower in a declining market). We really can't call price change trends after a few months because if we did, we would have reported declines in each of the past five years (years when the median home price soared).
It is clear that the rate of growth for home prices is coming down, but it is too early to say that we expect home prices to fall annually in most US housing markets. With 99% of markets reporting annual gains and 85% showing monthly gains, the market is clearly appreciating.
Rental Rate Growth Is Cooling Too
The final graph in today's Zillow Housing Report measures what Zillow refers to as the "typical observed market rental rate" and, like its Home Value Index, 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.
After peaking at more than a 17% annual growth rate in February, rents have "only" grown by 9.6% over the past twelve months.
Just as the inventory of homes for sale declined, so too has the number 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 higher, though each is rising slower than the rates observed at the beginning of the year.
In October, the median rental rate of $2,040 was nearly 10% higher than the median rental rate of $1,861 recorded in October 2021. This is important to understand because it is not just home prices that have become unaffordable, so too have rental rates. I often receive comments from viewers on our YouTube Channel saying they are waiting for home prices to fall. I certainly understand the sentiment, but I have to wonder, where are they living while they await home price declines?
Are they waiting in a rental property where their lease renewal will be 10% higher this year after rising even greater last year? Or are they waiting in a home they own? If they are right and home prices drop, won’t the home they own drop too? This means they’ll sell cheaper to buy cheaper! So what’s the point in waiting? That’s the trouble with trying to time the housing market; either way, you’ll pay more.
The fact that both rents and prices are moving higher together confirms that the supply of homes in the US is insufficient to house our growing population. Overall, when supply is insufficient to fulfill demand, prices rise. Until we see significant output from US home builders, we should continue to anticipate rising prices (and rising rents). There will be markets where the supply of homes outpaces demand, but overall, the US housing market remains undersupplied.
Home Affordability Crisis Continues
Home affordability is a pressing issue today. When people get priced out of the "for sale" market, they can no longer turn to the "for rent" market, as they will be priced out of that too!
When home prices crashed after the housing bubble, rents kept moving higher. That was a sign that we failed to interpret correctly, as it was a signal that despite the large inventory of homes for sale, there were not "too many" homes built in America.
The plummeting demand in the for-sale market that created the inventory imbalance was manufactured 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.
Loan qualification standards are not an issue today. The entirety of the housing crisis lies on the inventory side, so local governments must work to solve the lack of shelter problem. The rise and dominance of the NIMBYism movement must be quelled, and we need to find solutions to increasing the number of properties to house our growing population. The problem is simple to define but very difficult to cure. It will take a level of leadership that most elected officials do not possess.
You can do your part to fix our housing problems. Reach out to your local elected officials and tell them that you are not OK with soaring home prices and rents. Let them know it is purely a supply-side issue, one that requires a different plan of attack if we are to cure the shelter imbalance in America.
If you have thoughts on the limited housing supply in America, please share them in the comments section below.
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