Zillow Housing Update May 2022

Every quarter, I scour the Zillow website in search of data showing the changes in the US housing market. It is not my sole source of information, but Zillow does measure the housing market in a unique manner that provides great insight for those of us who really care about what is truly going on in housing.

One of the hardest things about reporting on the US housing market is finding reputable data sources that can give us what we need to properly evaluate current conditions, but I have become a believer in the data that Zillow shares on the backend of its website.

This report on the US housing market is primarily supported by data supplied by Zillow, and it provides enough information for us to draw a logical forecast of what to expect for the next year in housing.

ZILLOW HOUSING UPDATE VIDEO

Demand For Homes Is Falling?

The first graph in today's Zillow real estate update shows 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 above the horizontal axis, unit sales have grown. When the yellow bars fall below the horizontal axis, unit sales have declined.

March home sales reveal that for nine straight months, home sales have declined in the US when compared to the same months in the year prior. This is non-seasonal information, as each month's change is a comparison of the same month in two consecutive years. For example, the number of homes sold in March 2022 was 17% lower than the number of homes sold in March 2021.

With nine straight months of declining US home sales, does this absolutely mean that demand is falling? Historically, the answer would be a resounding "YES!" But I'm not so sure this is the full answer today. Let's take a look at a handful of other key metrics and then return to this important question.

There's Been A Spike In Mortgage Interest Rates

This graph plots the average 30-year fixed mortgage interest rate since 2016, and the most recent months show a definitive move to higher ground.

When I was preparing this graph on April 28, I checked the Mortgage News Daily website and it was reporting that the current rate was 5.3% while the one-year-ago rate was 3.14%, meaning that the cost of money for homebuyers has pushed up 69% in just one year.

Just chew on that statistic for a moment. The year-over-year change in mortgage interest rates is nearly 70% higher! A move like that has an immediate impact in the market that I liken to "sticker shock." The home that people thought they could afford a few months ago is now more expensive and requires a higher mortgage payment even if they finance the same amount of money. This results in them having to consider smaller homes for the payment amount they had planned on the larger home.

Skyrocketing mortgage interest rates have cooled buyer demand, yet I believe there is another factor that has greatly contributed to the number of homes sold each month declining for the past nine months.

The Supply Of Homes For Sale Continues To Fall

In this graph, Zillow is showing the unique listings that were active at any time in a given month since the beginning of 2019, and despite a decline in home sales, the inventory of homes for sale continues to shrink.

The blue field measures the number of listings, while the red line plots the year-over-year change in inventory. Look to 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 moved forward, the low level of supply got continually worse and bidding wars among buyers became the norm.

The peak of the market inventories were 600,000+ homes too few, and homebuilder production has not yet stepped up to fill in the void, though there are signs that this might finally reverse in 2022 for a handful of markets (BUT NOT THE US HOUSING MARKET OVERALL).

I believe the historically low number of homes for sale has been a significant piece of the declining sales dilemma, as buyers have been trying to obtain loans before low mortgage interest rates go away forever. When you combine rising rates and declining inventories, it is no wonder that the number of home sales is falling.

The Median Home Price Is Soaring

This next graph plots the median price 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 there is 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. The median sales price does not move in a similar manner.

I believe this is showing us two things. First, home prices generally rise, so it makes sense that end-of-year asking prices are higher than the beginning of the year asking prices. Second, it shows that 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 that 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, and this is primarily linked to the gross discrepancy between supply and demand.

Even with demand falling, we should not expect to see any relief from the rising slope of the median sales price until we start fixing the inventory shortage that has plagued the housing market since 2019.

Zillow's Forecast For US Home Prices

This graph is Zillow's take on the median home price. Zillow explains the results as a smoothed, seasonally adjusted measure of 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 range. In other words, it approximates the median by swiping the middle-third of the market and analyzing it over time.

You might have noticed that the horizontal axis includes a date range that extends to a year from now. Zillow has estimated home values from 2000 through March of next year with a forecast that home values will rise 14.9% over the next twelve months

Zillow’s Home Value Index is a clear image of how bad our housing market is behaving. Look at the slope of home value growth since 2020, it's toxically unhealthy. If you want some insight into what this price movement will do to the housing market, I urge you to watch some of my videos on home affordability. I am forecasting a move to a renter nation as home affordability plummets.

US Rents Are Soaring Too

The final graph in today's Zillow Housing Update serves as a test to ensure that I am not overreacting to moves in the for-sale market. You see, the for-sale market and the for-rent market do not operate in separate vacuums.

Historically, when home affordability surged, a segment of would-be sellers became landlords as declining demand made it harder to get homes sold. When home affordability improved, those landlords flipped their homes over to the for-sale market to finally get them sold.

We would see inventory shift from one side of the market to the other, so when one was oversupplied, it meant that the other would take up excess inventory. But as you'll see in this final graph, an inventory shift cannot happen today.

This graph measures what Zillow refers to as the "typical observed market rental rate" and like the previous graph, it takes a swipe from the middle of the market to approximate the median and it shows why we're not going to be able to fix this housing market in the same way the last one was fixed. 

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 should make your head spin.

As the inventory of homes for sale has declined, so too has the inventory of homes for rent. How do we know rental inventory is dropping (without actually having a dataset of rental unit supply)?

We can deduce this because rental rates are soaring. In March, the median rental rate of $1,904 was nearly 17% higher than the median rental rate of $1,630 recorded in January of 2021. Can you imagine if your monthly rent was increased from $1,630 to $1,904 per month? If the rate remains the same over the next year, that same median unit will rent for $2,224 per month, a rent hike of nearly $600 monthly in just two years!

Lessons From This Quarterly Zillow 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!

We have not been creating enough residential units to house our growing population, and unfortunately, inflation has pushed the cost of new construction to a level where the median home buyer cannot be served.

I am having a hard time finding a solution to what could be a severe turn towards a renter nation, where control of prices and rental rates move from "Main Street to Wall Street." We are seeing more "out of town" large-scale investors consume single-family detached homes, which historically, were not included in their housing consumption menu.

Zillow's current data shows that inventory in the US is falling, and from what I'm reading, very few local markets around the country will be spared from soaring prices and soaring rents.

My advice to all but the wealthiest of Americans is this: If you are happy in your home, be glad and enjoy it. If you are unhappy, you are running out of town to move into a home that you will both enjoy and be able to afford. Secure a home before it is out of your reach for good.