Dave:
Orphe, welcome back to On the Market. Thanks for joining us again.

Orphe:
Thanks for having me.

Dave:
Well, I want to start with a report that your team put out because I’ll just be honest, I liked the headline. It said, “Home shopping season shows signs of life as sales new listings rebound.” So tell us a little bit about it. I like the sound of signs of life. Where are you seeing that in the market right now?

Orphe:
Yeah, I want to catch this a little bit. We’re seeing an increase in sales, but it’s kind of normal. We’re getting to that kind of peak of the home shopping season, so that’s somewhat expected. I think the fact that mortgage rates are still below year ago levels also providing support for activity right now. The typical monthly mortgage payment, if you were to come up with 20% down, is down roughly 2.5% on a year-over-year basis. So that’s the positive, but it’s really a fragile recovery because there are so many headwinds. We know inflation is back to above 4%. The labor market is still very uncertain. Higher rates and quits are really low. Quits are low because people don’t feel confident enough to go and look for another job or jump ship to a better pay. And mortgage rates are volatile. So when you look at the Bureau of Economic Analysis, real disposable income shows basically had been falling this year.
It’s fallen for five of the last seven months. And so people are squeezed and the cost of everything has gone up. Now it seems housing with the cost of housing easing is good. It’s kind of the bright spot in today’s economy actually.

Dave:
Yeah, I see that. So I’m curious though, with all the affordability challenges, where is this new demand coming from? Is it because prices are a little bit soft and so people are willing to get discounts and then jump back in? And I know it’s tepid growth. We’re not saying there’s some big increase in sales, but even that little improvement is notable. So where is it coming from?

Orphe:
When we look at our days depending the time it takes for a home to go under contract, it’s really back to pre-pandemic levels. When you look at the share of homes that sell within a week, roughly one in five sell within a week, it’s still pretty fast. It’s basically back to the pre-pandemic level. We had gotten used to home selling really, really fast and things have kind of slowed back down to the pre-pandemic pace. And so the question I’m getting from a lot of people is, well, if things are just slowed back down to the pre-pandemic pace, why is it that total home sales are still so far below, roughly 20% below where they were before the pandemic? And really the answer to that is on the supply side. We have roughly 19% fewer homes for sale across the United States. And so the demand side, yes, affordability is a challenge, but affordability has been improving.
So the demand side’s actually been okay. Conditional listing your home, you could still sell it in a week. One in five will sell in a week. And median days depending is about 19 days last month. So still pretty normal. The supply side is what’s been lacking. And so when I look across the country at markets that have seen a small, a modest bounce in home sales, they’re the markets where we’ve seen the biggest increase in inventory relative to the pre-pandemic pace. So I’m looking at Austin, I’m looking at Raleigh, North Carolina where my metro area. Those are markets where the total number of homes for sale has now surpassed the pre-pandemic level. And there are also markets where we’re seeing the increase in home sales. So really very much all this to say, this is very much a supply story. In places where we’ve seen a big increase in supply, you’ve seen a bigger adjustment in prices that has helped improve affordability relatively more than in other places.
And that’s where you’re seeing the modest increase in sales that we’re seeing right now.

Dave:
And do you think that trend will extend to other markets? Because a lot of the ones you’re talking about were maybe some of the pandemic boom towns, places that grew really quickly and there’s been a modest correction. Do you think there’s a chance we see a more broad-based increase in new listings and inventory that might help the market gain a little bit more steam?

Orphe:
Yeah, unfortunately those markets, like you said, are the markets where you basically saw the big increase in new construction or a lot of new homes end up back on the market as existing homes and so all homes are necessary. Unfortunately, of course, the constraint is in markets that just don’t build a lot of housing. It’s in the Northeast, it’s on the West Coast where you just haven’t seen a big increase in supply. And in the last year and a half or so, builders have already begun to pull back. And so that pullback basically means that we’re not likely to see that big increase in sales across the country like we were hoping to see. And so you’re looking at a housing market that’s seeing a modest increase in home sales, but where the constraint very much lies on the inventory side, the supply side of the market.

Dave:
To me, it just feels like we’re in the most boring housing market we’ve ever been in. It’s not terrible. It’s not great. It’s just kind of flat. The listeners of the show will know I call it the great stall. We’re just in this stalled period. And I have a hard time imagining what breaks us out of this other than some sort of big macroeconomic event that changes or shifts the balance between supply and demand, whether that’s a big increase in unemployment or a recession. What are the things that could move us out of that? So I won’t make you make a prediction, but how do we get unstuck?

Orphe:
The current environment is not all bad. I

Dave:
Agree.

Orphe:
I looked at listings. My colleague Kara on the Zillow economic research team looked at listings on Zillow that would still be cashflow positive for investors. And so looking at for sale listings on Zillow where the full carrying cost, principle, interest, property tax, insurance, maintenance compared to the rent you would get for the unit or rentals estimate would still generate some positive cashflow. And we also flagged listings that would clear roughly $1,000 or more per month. And when you do that math, which I think is very interesting, in markets that are slower, there are more opportunities that arise. You’re no longer really engaged in bidding wars with other buyers. And so there’s an opportunity here. And so when we do that math, what we see is the highest share of listings that would be cashflow positive on Zillow are in markets like Buffalo, those suply constraint markets, Buffalo, Detroit, Cleveland, St. Louis, Missouri.
In Buffalo, roughly 10%, one in 10 listings could clear $1,000 a month in cashflow.

Dave:
$1,000 a month?

Orphe:
A month. So there are opportunities out there. What do these markets common? Well, the common thread is a low price to rent ratio. Cheaper prices relative to the rent that the property would command. And I think that’s the whole game. And so even though it’s this slow and maybe boring housing market, it doesn’t have to be that way for investors always out there looking for opportunities to take advantage of current conditions.

Dave:
I agree with you completely. I actually think right now is a better opportunity to buy than I’ve seen in a while because even though inventory is not rising, you see, like you said, days on market improving, the ability to negotiate, the leverage that you have, the concessions that sellers are offering. If you look at the combination of those variables and the lower competition, it’s just easier to find things right now than it has been in years. So I’m with you on that. And I think the other thing about a boring market is when I say boring, I don’t mean bad. I just think on a show where we talk about the housing market all day, there’s not much changing. Not much has changed in the last couple of months. It’s just stagnant. But I have two questions for you. First and foremost, how do I get my hands on that list of properties that you get a thousand bucks a month in cashflow?
Because I think our audience would pay big money for it. I’m

Orphe:
Teasing it out. It’s something we haven’t published yet at Zillow, but we will make sure to let you know

Dave:
As soon as it’s

Orphe:
Released.

Dave:
We want to see it.

Orphe:
Again, it’s zillow.com/research is basically our research page where you could find all of our insights, everything we observe on the Zillow platform.

Dave:
I assume with your colleague, I know it was your colleague’s research, but was that assuming a purchase price at asking?

Orphe:
Yes, that’s right. Exactly. You’re assuming asking the listing as it is on Zillow right now. But to your point, this is very much negotiable right now.

Dave:
Yeah. You might be able to do better.

Orphe:
Exactly. Exactly.

Dave:
So if we’re in this boring market though, do you see this continuing for the foreseeable future? Just not a lot of movement in either direction?

Orphe:
Yeah, I think we probably are going to continue to see modest improvements in sales. I think price growth, when we look at home value appreciation, it’s pretty flat. We have it at 1.1% for the year forecasted. But when you consider the fact that builders have pulled back, we’re really starting to see it with rentals. We expect completions, multifamily completions to drop roughly 17% on a year-over-year to finish the year, roughly 17% down on a year-over-year basis. And so when the flow pulls back so much, it’s unlikely that we’re going to continue to see the vacancy rate rising. And we’re already seeing that in our data. Rent growth has been firming for the past three consecutive months compared to last year, taking the seasonality out of it. So to me, what that tells me is that the pullback in supply is likely going to start putting upward pressure on both rents and prices across the country.
And so for people that were sitting there in these markets that they felt supplied like Nashville or something like that where you couldn’t really feel like you couldn’t raise the rent, well, I think those people are going to start to see with the vacancy rate basically plateauing, that they’ll be able to command higher rents and that the amount of concessions they had to give up is likely going to start falling back. So whether we’re going to see a lot of sales activity, a big boost in sales activity, that remains a big question mark. But on the price front, I think the fact that builders have pulled back could mean that prices and rents will start to firm up again. Now I’m a litle bit optimistic because on the policy front, you’re hearing that at all levels of government, people are more and more are talking about affordability.
They’re talking about unleashing builders to build more housing. They’re talking about changing land use restrictions and building codes to allow builders to build more housing and to build denser. And so I am optimistic that if all of those things come to pass and you start to see a big policy shift to allow builders to build more housing across the country, we’ll start to see more transaction activity. Probably not in the near term, but that’s something to look forward to over the next few years.

Dave:
Well, I have a few questions about that. Let’s start with the rent piece because that was sort of my thesis going into the year that if you look at the main variable that has been suppressing rent, it’s all this multifamily supply that we’ve had from the last couple years. And we know the great thing about multifamily is you know years ahead when it’s coming. So it’s a relatively easy thing to forecast and we know that we’ve hit the peak in all the supply coming online. Now it’s going to start declining. That should improve occupancy rates and then we should see rent start to climb again. That sort of was my opinion. I’m wavering a little bit though, because I guess my concern is if you look at just affordability throughout the economy, not housing only, and you see people just being pretty constrained, the savings rate is going down, consumer sentiment’s extremely low, default rates on credit cards are going up, all of these issues.
Is that going to weigh on household formation? Could we see lower demand for housing because people are going to do what they do during hard times, which is continue to live with a roommate or move in with family or those kinds of things?

Orphe:
Yeah, I think that’s a good point. The answer to that is people tend to delay. They’ll delay. They won’t stay at home forever. Hopefully not. Yes, exactly. We may see a bit of a delay, but that’s very much tied to what the economy is doing. So if the labor market starts to heat up again, if inflation comes back in line, those problems start to disappear again. So I’m not too concerned about that part as much as I was as well. Those are things that you have to consider when you sit down and write down a forecast, headwinds and tailwinds. And you’ve highlighted some of the headwinds in the near term.

Dave:
Yeah, I guess it is obviously very regional. If you’re in a market that’s going to go from supply glut to supply constraint, you’ll probably see rent going up. If you’re in a market that’s just pretty unaffordable and still has a decent number of multifamily deliveries, have modest expectations for rent. The second thing I wanted to ask you about, which you mentioned earlier, was just about the housing shortage because I’ve talked about this, we talk about all the time, anywhere between one to seven million units short. I think most estimates are three to four million. I don’t know if you have one at Zillow.

Orphe:
I’m at roughly 4.7 million. Mine is very transparent in fact. I love talking about it because it’s the one that makes the most sense. I’m comparing the number of families that are doubling up, low-income families that are stuck sharing a unit to the number of homes that are actually available across the United States for rent or for sale.

Dave:
Wow.

Orphe:
And so when you do that simple comparison, what you learn is the gap is roughly 4.7 million. If every one of those families, which I’m sure they would love to have a unit of their own, not share a house with people that are unrelated to them. If we were to put all those families out and say, “Hey, we’d love to give you a unit of your own,” there wouldn’t be enough to go around for everyone. We’d be short 4.7 million units.

Dave:
Wow. And

Orphe:
So very simple math, very transparent.

Dave:
I like that.

Orphe:
You could replicate it by using the American Community Survey and you come up with this number and you could track it over time. And so we’re actually going to update with the latest American Community Survey. We’re going to update that number and that should be coming out in the next week or two on the platform. Yeah.

Dave:
I’ll definitely check that out. And just so everyone knows, the American Community Survey is part of the census. It’s public data you can go get for yourself if you want to check this out. Super interesting. Well, I like your definition too. It makes a lot of sense to me. My question is, is this supply shortage a moment in time? Because you have a real supply shortage. I believe that. We also have a demographic trend that suggests that boomers are aging. At the same time, we have lower birth rates, have very low immigration rates right now, and current projections are that our population is going to peak sometime in the 2050s, give or take look at different projections. So is there a chance that even if we do almost nothing and just keep construction rates at the pace that they’re at, could in 10 years this supply shortage just be equilibrium or potentially even a supply glut?

Orphe:
It’s a very difficult question to answer because remember a decline in population or even just the slowdown in population growth also assumes fewer potential construction workers and fewer plumbers and electricians. And so you’re going to likely get a stronger decline in the supply of housing.

Dave:
Existing supply will deteriorate faster.

Orphe:
Existing supply definitely deteriorates over time. And so that’s one of the problems I think to consider. The other one is, and we’ve looked at this at Zillow as well, is a lot of young people like to move to areas with vibrant labor markets where the jobs are. So they’re moving to the coasts. They’re moving to New York and Miami and Seattle and San Francisco. And what you learn when you look at the demographic profile of this country is that a lot of the homes owned by older Americans on these big lots that we could potentially build on are in the Midwest. They’re far away from those big job centers that people are moving to. And so there’s a bit of a spatial mismatch here that needs to be resolved as well. And so I’m not necessarily optimistic that just shrinking the population is going to result in fixing the mismatches that we have currently.

Dave:
Right. And actually I was looking into this myself and I was looking at Japan because it’s a country with declining population. I was curious what happened there. And what it shows is similar to what you described, which is that in rural areas, home prices did go down, but there was a lot of basically abandoned homes or vacant homes. That’s right.
But metro areas were essentially unaffected because everyone still want to live in the areas with economic opportunity. People just moved to that. So yeah, that does seem like the most likely scenario, but it’s just something as an investor and a housing analyst, it’s hard to wrap your head around how that could play out because these are two big trends going to collide with each other probably in the next 10 years or so. So great to get your take on that. So Orfe, what else are you working on? I mean, you’re telling us all this cool stuff. You’re updating us on the housing shortage, you’re updating us on rental opportunities. What else interesting is going on at Zillow that we should know about?

Orphe:
Yeah, again, the website is zillow.com/research. A lot of people just go to zillow.com to look at housing, but the research lives on the research page and we’re constantly putting out content. I think one of the pieces that I’m going to share soon is on pricing. The fact that it’s really important to price your home right as a seller. And a lot

Dave:
Of investors

Orphe:
Will have to exit at some point. They become sellers. And we can actually see the number of engagement on units on Zillow and how much that engagement translates to sales to have faster home sales, but also the price the home commence. And basically I think it’s very dangerous and I think it’s important to reiterate this. It’s very dangerous to price too high

Dave:
Because

Orphe:
Ultimately some people say, “Well, you should price high and then you’ll get –

Dave:
Negotiate.

Orphe:
What you were hoping for. ” And ultimately it’s the opposite. A lot of times you price too high and you end up getting a lot less than other similar homes that were priced better to start with.

Dave:
Is that regional? I’m just curious if that’s regional because I’ve sold two homes recently. One in the Seattle area is a flip. And I knew in this market everyone’s haggling. So I put it on not priced high. I priced it what I thought was exactly right. I did not price it low. In my head, I knew I was probably going to get below that number and that’s what happened. I still did fine on the property, but I kind of did go with that strategy of price it normally and accept the concession and it worked. And then I sold in another market that was hot and I actually priced it a little low and I got three offers over asking. So that pricing it low really did work. So I’m just curious if it depends on market dynamics, how you should list your listing strategy.

Orphe:
Absolutely. You got to be cognizant of the competition, the number of units that are actually vacant in that market, who you’re competing with. It’s true for the for sale market. It’s also true for rental listings. You got to understand the relationship between supply and demand in that market, the bargaining power between landlords and renters. So I think that’s absolutely key, which brings me to my next point. We do have a metric for that. Our market heat index,
You should definitely check it out so you can see where the market stands and relative bargaining power. We have the share of listings with a concession for rentals, which is another great metric that I think listeners should take advantage of. You can see that really tells you something about relative bargaining power between landlords and potential tenants. In a market like Denver where roughly 60% of units have a concession, you cannot go ahead and get rid of the concession or try to price too high because your listing’s probably going to sit longer and you won’t be able to fill it. So make sure you pay attention to those types of metrics. That’s really, really important.

Dave:
Well, I’m going to because I’m about to list a property in Denver. So price it to sell, you’re saying.

Orphe:
That’s right.

Dave:
I’m not expecting to get top dollar there. I’ve owned it for a long time. It’ll be fine. But yeah, I was just curious. I think so much of it is a foot traffic game. If you price it well, you’ll get a lot of people into the house. And if you have a goodhouse, people will offer on it. If you price it too high, no one’s giving you to come and then you don’t even give yourself a chance to get into a conversation.

Orphe:
That’s right. You got to know your submarket. Don’t just look at the national number or the national headlines. You really got to do your homework and understand the market you’re in.

Dave:
Well, Orphe, this has been awesome. Thank you so much for coming here and sharing what you’re doing with Zillow and your team is doing. Super good information. We’ll update everyone. I know everyone’s going to really want those where you could still find cashflow at 1,000 bucks a month, that’s going to be popular. So we’ll definitely publish that when we hear about it. But you can check out all of Orfe and his team’s research at zillow.com/research. Thanks again for being here.

Orphe:
It’s a pleasure. Anytime.

Dave:
And thank you all so much for listening to this episode of On the Market. I’m Dave Meyer. We’ll see you next time.