Is Zillow’s 1-year market rate forecast too rosy?

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Everywhere you turn you read about housing reversion to a buyer’s market. Of Initiated “3 signs that the housing market is slowing down”, for US News and World Reports“Is Housing the Next Shoe to Drop for the Economy? Homebuilder Confidence Plunges in July,” leads you to believe that the record home price growth we’ve seen over the past few years is nearing its end.

On the other hand, Zillow’s postcode market report emails paint a completely different picture of housing confidence.

I receive monthly emails from Zillow that predict the average value appreciation for the ZIP code of my country home in Vermont. Every month for about a year, Zillow has predicted an annual appreciation among teens. Recently they claimed that this time next year my house could be worth 17.8% more by summer 2023!

Thinking this zip code might be an anomaly, I looked at the zip code of a property in Boston’s Jamaica Plain neighborhood, where Zillow predicted 8% year-on-year growth.

While these types of appreciation rates are great for owners to have, it’s hard to believe that appreciation will continue at this record pace.

Of course, there is still a lot of demand for homes in the United States. However, the borrowing costs these buyers face have increased significantly over the past year. In fact, the monthly cost of the average mortgage in the United States has increased by 40% since the start of the year. So while many people still want to buy a house, the price of the house they can afford has gone down.

Interest rates and inflation

Interest rates have risen because Federal Reserve raised rates to slow inflation. With the latest inflation report released in July showing that inflation remains stubbornly high, the Fed has committed to further large interest rate hikes. For potential buyers, this means that mortgage interest rates continue to rise in the second half of 2022, further increasing borrowing costs and lowering the price many people can pay for a home.

With all of this in mind, the question remains: why is Zillow predicting such strong continued growth in the housing market?

First, it is possible that Zillow’s market reports are driven primarily by historical buying patterns in the region and ignore Fed central bank activity that impacts affordability and, by proxy, on the growth of house prices.

The housing market is a bit more complicated than just supply and demand. Yes, these factors are very important, but another factor looms large: the cost of borrowing capital or the interest rate on your mortgage.

Second, projecting a declining market might not be in Zillow’s best interest. Zillow makes money by selling leads to real estate agents. If Zillow’s marketing to landlords makes them believe that the time is still right for them to sell, it could give landlords more confidence to sell with a Zillow agent.

Additionally, Zillow would like to signal to potential buyers that prices continue to rise and now is the time to buy. Ultimately, the more homes trading and the more buyers and sellers using their platform, the more revenue they will see.

Third, Zillow could take into account all relevant indicators about future growth and know something that many leading economists and real estate experts don’t! For example, despite rising interest rates, data from Zillow could indicate that institutional investors with ample cash could step in and continue to drive up house prices in all markets. Or, they could simply predict that housing demand will continue to outstrip supply, but such magic that the only place housing prices will go up is.

No matter how or why Zillow always predicts this appreciation, I personally remain skeptical. Surveys of homebuilders show wavering confidence and even falling prices. Lenders are rewriting mortgage pre-approvals, as they must every 90 days, and rates are only going up.

I think there is more evidence of a flattening of price growth than of continued appreciation. So while I have absolutely no intention of selling, I also don’t think my house will be worth 17.8% more in 12 months. I’ll let you know how it goes!

David Friedman is CEO and co-founder of Knox Financial.

This column does not necessarily reflect the opinion of the editorial staff of RealTrend and its owners.

To contact the author of this story:
David Friedman at dave@knoxfinancial.com

To contact the editor responsible for this story:
Tracey Velt at Tracey@hwmedia.com

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