Zillow Tailwinds

It’s a new year and many, including Zillow economists, are optimistic. After a year in which almost half of agents reported selling one home or less, optimism is a valuable tool. To that end, there are a few major macroeconomic tailwinds that might fuel the early months of 2024:

  • The job market remains strong.
  • Despite a couple of blips in January, inflation continues to trend toward the 2% target rate.
  • The Fed has signaled that benchmark rates were likely at or near their peak while hinting at rate cuts.

Benchmark rate cuts can mean mortgage rate softening. Mortgage rate softening means more sellers loosen their grip on rate lock. Taken together, these trends drive a healthier housing market.

That’s the glass-half-full picture. Now let’s take a deeper look at a few trends.

More homeowners want to sell

Twenty-one percent of homeowners are considering selling within the next three years, according to Zillow research from December. That’s up 15% year over year.

Here are some of the most common reasons why:

Tech jobs, long-distance movers are spreading out from traditional hubs

Zillow analysis of United Van Lines data shows that long-distance movers are heading to metro areas that are less expensive and have less competition from other home buyers.

“Housing affordability is reshaping migration trends. Buyers are moving where homes are more affordable and where there’s less competition,” says Zillow Senior Economist Orphe Divounguy. “Affordability remains the biggest challenge for most homebuyers today. Helping them navigate it by pointing them to a loan officer first is key. It’s even more crucial if they’re new to the area.”

Out are states like New Jersey, New York, North Dakota, Illinois, Michigan, and California. Top destinations include Charlotte (Zillow’s hottest market prediction for 2023), Providence, Indianapolis, Orlando, and Raleigh.

Additionally, a recent Brookings report found that tech jobs are spreading out. Traditionally concentrated in hubs like San Francisco, Seattle, and New York, tech employment is branching out to new “rising star” metros. Since 2020, cities like Dallas, Austin, Denver, Miami, Nashville and Salt Lake City are pulling larger shares of tech work.

The study found that this phenomenon was already underway, but that the pandemic, remote work, and high mortgage rates likely accelerated it.

Takeaway: Cities and states gaining workers are almost all more affordable than the traditional tech hubs. Out-of-town leads in these rising star metros may have healthy incomes and be looking to view upper-tier buys.

While rent growth slows in many markets, concessions are up

Rent growth is slowing in many major metros and rents are even falling in a few. Nationally, rents are still up 3.3% from a year ago, but they dipped (0.2% from the previous month). Forty-five of the 50 largest metro areas have seen annual increases.

  • Annual rent increases are highest in Cincinnati (7.1%), Providence (7.1%), Hartford (7.1%), Buffalo (6.3%), and Louisville (6.1%).
  • Rents fell month over month in 32 of the 50 largest metro areas. The largest drops are in Jacksonville (-0.8%), San Diego (-0.7%), New York (-0.6%), Denver (-0.6%), and Austin (-0.6%).

Rental concessions, like free months of rent or free parking, have surged unexpectedly. In December, 32.7% of rentals on Zillow offered at least one concession. That’s up just 0.7 percentage points from November but 10.1 percentage points from last year. This rise is especially prevalent in cities like Oklahoma City and Memphis, which each saw a 4 percentage point increase from November to December.

Takeaway: Leads may be weighing another lease before a purchase. But equity starts when you buy. Those who plan to live in their new home for long enough can start building that equity now, and most experts agree that significant rate drops won’t happen anytime soon.


Predicting The 2024 Real Estate Market

Yesterday, Jay Powell shocked the world by declaring three rate cuts in 2024! It was Fed speak of the most unusual order – open and transparent, instead of the opaque mumbling of previous chairmen.

The predictions are for rate cuts early in 2024 too. The CNBC survey showed a 90% probability of a rate cut at the Fed’s March meeting, and 100% chance at the May meeting. This Fedwatch Tool below thinks they will all be in the first half of 2024:

What does it mean for the 2024 Spring Selling Season?

Real estate prognostications are usually wild guesses without any supporting data. But next year looks more predictable than ever – and we’ll be able to track it closely.

Let’s consider how 2023 played out:

In June, I mentioned that 2023 got off to a very fast start, and that March would have the highest sales count of the year – which means buyers and sellers were active in January and February!

We had a mid-summer surge too, and the August sales beat out those in March by a nose.

Because the price points are so much higher these days, every property is a luxury home that appeals to the affluent. It means the homes for sale need to be spruced up more than ever, which takes planning and preparation for weeks and months.

We already know that our team will be listing homes for sale on January 18th and 25th, and there should be many more others doing the same. With the 2023 inventory being so bleak, the pent-up buyers will be noting the lower mortgage rates and be on the prowl early.

We will do our annual January inventory contest to give everyone a feel for how the number of homes for sale is breaking early in 2024. Between the number of January listings and the results of our listings, you’ll have quality data on how the 2024 market is unfolding!

My guess is that there will be 10% more listings in January, and combining that with lower mortgage rates could set off a mini-frenzy!

Pricing was steady this year, and it should bump around by the same +/-5% in 2024. It’s probably not worth it to try to predict your purchase or sale by the price history – it will bounce around just because the metric is flawed.

Playground For The Wealthy

A former federal regulator who served when the 2006 housing bubble burst is concerned that today’s housing market is on an unsustainable path.

The housing market’s affordability is worse than it’s been in decades as mortgage rates toy with 8%. The median price of a U.S. home was $322,500 in the second quarter of 2019. Then the pandemic housing rush hit, and prices across the nation shot up. High mortgage rates sent sales spiraling, but home prices only experienced a minor correction before heading back up. In the second quarter of this year, the median price was $416,100, according to the Federal Reserve Bank of St. Louis.

“Talk about a bubble. That’s a classic supply-demand imbalance,” Sheila Bair recently told CNN.

Bair, who served as a federal regulator when the mid-2000s housing bubble popped, nearly taking down the entire financial system, said home prices today are “bubbly” following years of low mortgage rates.

A housing bubble can form when prices rise to unsustainable levels. This can be caused by speculative buying, as was the case during the sub-prime mortgage crisis when people who could not make the monthly payments on their mortgages were buying homes with very little money down. The bubble popped when home prices dropped and many people owed more on their home than it was worth.

A bubble can also be caused by irrational exuberance, in which a surge in prices leads to a buying frenzy.

“When rates were cheaper, a lot of people wanted to buy. You ended up with really frothy price increases. That was pretty predictable,” said Bair, who led the Federal Deposit Insurance Corp. from July 2006 until July 2011.

Although Bair said home prices need to correct downward, she’s not confident that will happen anytime soon because there’s still a shortage of homes on the market and she doesn’t expect the bubble to violently burst.

“If supply remains constrained, this could go on for some time,” said Bair, who last week released a new children’s book about bubbles called “Daisy Bubble: A Price Crash on Galapagos.”

There were just 1.1 million existing unsold homes on the market as of the end of August, down 14.1% from the year before, according to the NAR. “Letting that bubble deflate a bit would probably be a good thing,” said Bair. “People who already own their home – and I’m one of them – don’t want to hear that. But for those who want to own, I hope home prices do come down.”

Over the past year, the median home price has increased by 23.8% in Los Angeles, 18.2% in San Diego, 15% in Richmond and 14.6% in Cincinnati, according to Realtor.com.

The good news is Bair does not see a repeat of the bursting of the mid-2000s housing bubble, which set the stage for the Great Recession. That’s in part because a typical homeowner today has more equity in their homes than a homeowner during that time. Only 1.1 million homes, or 2% of all mortgaged properties, owed more on their mortgage than their home was worth in September, according to CoreLogic. That is a small number compared with the share of properties underwater during the sub-prime mortgage crisis, which topped out at 26% in the fourth quarter of 2009, according to CoreLogic’s equity analysis, which began in the third quarter of 2009.

In addition, mortgage lending standards are significantly tougher today, meaning fewer people are borrowing more than they can afford.

“I see much less speculation in the housing market today, thank goodness,” said Bair.

And unlike in the mid-2000s, homeowners today have built up a significant cushion of equity. That means they shouldn’t find themselves in a situation like during the subprime meltdown where many owed more than their homes were worth.

“Even if home prices adjust a bit, people should not be under water,” said Bair.

Legendary investor Jeremy Grantham shares Bair’s concern about a housing bubble. He has been warning of an eventual plunge in home prices around the world.

“Real estate is a global bubble,” Grantham said on The Compound and Friends podcast last month. “Home prices will come down…30% would be a pretty good guess.”

Yet others on Wall Street are confident home prices will continue rising.

Despite high mortgage rates, Goldman Sachs expects US home prices will increase by 1.8% this year and then accelerate to 3.5% growth in 2024. Similarly, CoreLogic forecasts that home prices will increase by 4.3% from June 2023 to June 2024.

Although UBS acknowledges home prices have spiked to “dizzying heights” in recent years, the bank only sees two cities around the world at risk of being in a bubble: Zurich and Tokyo. That’s down from nine cities a year ago. Miami, Los Angeles, Toronto and Vancouver are among the cities that UBS says are in “overvalued” territory.

Fannie Mae CEO Priscilla Almodovar said it’s “unusual” that home prices have not taken more of a hit from high mortgage rates. “What has surprised us the most is the stickiness of home prices,” Almodovar told CNN in a recent interview. “Supply is the issue. There is no place to go. There is a lack of inventory.”

That’s the main reason Lawrence Yun, chief economist at the National Association of Realtors, says homebuyers shouldn’t hold their breath waiting for a drop in home prices.

“There is not going to be a home price crash,” Yun told CNN. “When you have a housing shortage, home prices simply cannot decline in any measurable way.”

While a temporary dip in prices is possible, Yun said a “prolonged” drop of 10% to 15% “cannot happen in this tight supply market.”

Yun noted that many assumed London was in the midst of a housing bubble years ago – only to see prices continue to rise, albeit with fewer people participating.

“It became only a playground for the wealthy. I hope America doesn’t go in that direction,” he said.

In many ways, today’s housing market is the polar opposite of the one that preceded the Great Recession.

Back then, reckless mortgage lending helped create a situation where demand became artificially strong. Eventually, it collapsed and the market was left with way too many homes.

“Today, we have an imbalance the other way. Too much demand, not enough supply,” said Yun.

The NAR has estimated the supply of homes needs to basically double to moderate home prices.

“It’s creating social inequity. The only way out of this situation is we have to induce more supply,” said Yun.


More 2024 Predictions

Lawrence Yun, NAR’s chief economist, believes mortgage rates could remain around 7 percent for most of 2024. However, he thinks rates have likely crested: “I believe we’ve already reached the peak in terms of interest rates.”. Within two years, he says, the rate should return to 5.5 or 6 percent.

Yun foresees no major changes in purchase price tags on a nationwide level next year, with fluctuations of only about 5 percent one way or the other. The only exception is California, he says, where the market could see 10 percent declines: “Because it’s so expensive, California is always the most vulnerable to changes in interest rates.” Overall, in five years, Yun expects prices to have appreciated a total of 15–25%.

McBride predicts home prices will average low- to mid-single-digit annual appreciation over the next five years. This rate of appreciation, he says, is consistent with the long-term average of home prices increasing by a rate that hovers a percentage point above the inflation rate.

While it may show bubble-like characteristics, Yun does not expect the residential real estate market to pop. He said, “A crash happens with oversupply,” Yun says. “A 30 percent decrease will not happen, because there isn’t enough inventory.” He believes the housing supply will balance out within five years.

Zillow has a similar forecast, as it expects home values to rise by 6.5% from July 2023 through July 2024, despite “despite persistent affordability challenges.”

Likewise, Freddie Mac is forecasting prices rising by 0.8% between August 2023 and August 2024, followed by another 0.9% gain in the following 12 months. Part of the rebound in prices is based on the “large cohort of Millennial first-time homebuyers reaching prime home-buying age,” Freddie Mac reports.

The CoreLogic HPI Forecast indicates that home prices will not change on a month-over-month basis (0.0%) from October 2023 to November 2023 and increase on a year-over-year basis by 2.9% from October 2023 to October 2024.

Rick Sharga said, “Home prices will probably rise slightly in 2024, perhaps by 2-3% as demand continues to outpace supply. However, this will not be universally true; some formerly high-flying markets like the Bay Area in California, Austin, and Phoenix could see prices continue to fall, while cities in the Southeastern states may see prices rise more quickly.”

Nick Ron, founder and CEO of House Buyers of America, expects average home prices in the U.S. to rise around 3 to 4% next year. “But at some point in 2024, I see a slowdown in price growth.”

Goldman Sachs analysts predict home prices will continue to climb before dipping this winter, then rebounding “only modestly” in 2024. Then, their model projects “a rebound to below-trend home price growth … as rates decline modestly but remain at elevated levels.” In December 2024, they predict national home prices will increase by 1.3% year over year. That’s a downward revision from July, when Goldman predicted a 1.7% home price increase in 2024. So far in 2023, home prices have increased an estimated 4.2% “but are likely to fall 0.8% through December for a 3.4% year over year increase,” Goldman analysts wrote.

Not all forecasts expect home prices to climb, however.

Redfin thinks that home prices will fall 1% year over year in the second and third quarters, when the home-selling season is in full swing. That will mark the first time prices have declined since 2012, when the housing market was recovering from the Great Recession, with the exception of a brief period in the first half of 2023.

Based on declining affordability and more homes being built, both Moody’s Analytics and Morgan Stanley expect home prices to fall slightly in 2024.

Morgan Stanley housing analysts expect home prices to hold steady year over year in 2023, before edging lower next year.? “We forecast house prices in 2023 to finish the year flat versus 2022 before falling 2% in 2024 as affordability continues to adjust slowly back to long-run averages and inventories begin a slow climb off multi-decade lows,” wrote the firm’s housing research team.?

Moody’s says “it’s premature to celebrate the end of the housing correction,” which is why it expects median home prices to decrease by 3.5% between the fourth quarters of 2023 and 2024, according to an updated forecast.

Andrew Lokenauth, owner of BeFluentInFinance: “Home prices will likely drop 5-10% nationally in 2024 as demand softens further. Affordability issues, economic uncertainty, and moderating investor activity will weigh on prices. Of course, the exact amount prices will reduce will depend on local market conditions and employment trends.”

2024 Predictions

We’re in the forecasting time of year!

The chart above is from Realtor.com. We are used to the ivory-tower types who don’t bother to get out of their office or even pick up a phone. They just shine up their previous guess with some current events, like lower mortgage rates, and tell everyone we’re going to be fine.

But their guess that sales will be up 11% in San Diego is preposterious, and giving credit to lower rates doesn’t address the ultra-low inventory that is so likely to persist:

For sales to increase by 11% means that inventory will have to increase by the same or higher amount. While an 11% to 20% increase in the number of homes for sale would be fantastic for the market, there is virtually no evidence to support that idea – other than I have three listings booked already.



If you’d like to make your own predictions, here is some local data (La Jolla to Carlsbad):

NSDCC Detached-Home Listings & Sales, Jan 1 to Nov 30

I’m guessing that sales will be flat/same in 2024, and the median sales price will be +4%.

Why? Because I think we’ll see mortgage rates in the sixes, which will help to energize the demand. The number of listings may grow slightly but not up by more than +10% and many will be wronger on price, which will cause the number of sales to be about the same as they were in 2023.

We know it will be hot during the selling season, it’s what happens in the second half of the year that will drag down the median sales price.

Here’s what I thought last December:

San Diego County Detached-Home Listings & Sales, Jan 1 to Nov 30:

San Diego Case-Shiller Index, September

Ok, ok – yesterday I said that we’re at the highest pricing ever, but the San Diego non-seasonally-adjusted Case-Shiller Index isn’t quite there yet.

But it feels like record pricing around the north county coastal region, doesn’t it?

The index dropped eight months in a row last year, and it might track negatively over the next few readings of 2023 – big whoop. The index gave back 11% last year, and we’ve regained all but 2% of it this year.  It is a seasonal event that will probably repeat in the coming years.

If the pricing keeps trending upward in 2024, at least it should be somewhat offset by lower mortgage rates this time. The quick rise in rates in the middle to late 2022 had to be reflected in the pricing, which it was. But this year, pricing held up nicely in spite of touching 8% rates recently.

I’m predicting an increase in listings next year, and it could amount to a full-blown surge. I already have three listings lined up for early-2024, which has never happened this early – there have been years where I get well into January without sniffing a new listing!

I’ll survey my fellow agents over the next couple of weeks to see what they say – two have already agreed!

More Hopium

Morgan Stanley analysts previously expected national home prices to fall 4% in 2023, as the housing market continued to crater, and reaffirmed their pessimistic forecast in April of this year. But the analysts recently changed their tune in a big way: They now say housing prices could rise up to 5% for the year.

The reversal, made in a research note earlier this week, comes as mortgage rates continue to rise, hitting 8%, the highest level since 2000. The increase has had a profound impact on the housing market, but not necessarily as many people had expected.

For one thing, it’s keeping the supply of homes for sale tight largely due to the lock-in effect, which prevents homeowners that have lower mortgage rates from selling because it would require buying a new home at a much higher interest rate. That’s helping to prop up the market by creating big demand for the relatively few houses for sale, further deteriorating affordability.

Morgan Stanley isn’t the only financial institution to suggest home prices will likely increase. Roger Ashworth, a managing director at Goldman Sachs, recently wrote that despite affordability being worse than in the 2008 housing crash, housing itself is in a much stronger position, largely due to a low supply of homes for sale.

“Absent any negative shocks to the broader economy that would either boost excess supply of homes on the market or fuel an uptick in unemployment, we continue to expect home prices to rise at a slow pace,” he wrote. And he predicts that by the end of this year, home prices will rise 1.8%, with a 3.5% increase by the end of 2024.


Inventory Watch

Recently the president of the local association of realtors was asked what the real estate market will do in the future. His response: “Nobody knows what the market is going to do in the future”. Of course, immediately after that comment he said, “Interest rates have to drop to 5.5%. Then you’ll see everyone get excited and say, ‘Hey, let’s sell our house and get another one.'”

Even if mortgage rates to go back to 5.5%, people are living in their forever home. The difficulty of finding a better home for a decent price will overwhelm any minor inconvenience at their existing home.

I don’t mind predicting the future. The rest of 2023 is going to look a lot like it did last year:

Next year, the inventory should grow quickly in the April-July time frame. Price will fix everything else!


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