As a homeowner and real estate investor, I want home prices and rents to rise. Real estate is an integral part of my Fat FIRE strategy of perpetually generating six figures in passive income. So when I saw Zillow’s latest bullish housing price forecasts, I was thrilled!
Zillow believes national home prices will increase by 6.5% through July 2024, which seems overly aggressive in this high interest rate environment. If you have a 20% downpayment or 20% equity, a 6.5% price increase is like making a 32.5% gross return on your cash or home equity. That’s a pretty hefty return.
After feeling good for a moment about my real estate portfolio increasing in value next year, reality set in. In the past, Zillow has been wrong consistently when it comes to forecasting housing prices. I don’t this time is any different.
Zillow Housing Price Forecasts By Region And State
See the map below showing Zillow’s home price forecasts by region. Notice how Zillow believes home prices will rise by 2% to 10% in every state except for three regions in Louisiana.
As you may recall in a May 2, 2023 post, A Window Of Opportunity To Buy Real Estate Emerges, I also believed there was upside potential to real estate prices.
So maybe three months later, Zillow and other institutions are coming around to my point of view? I just think 6.5% is too aggressive by at least two percentage points.
Why Zillow’s Housing Price Forecasts Are Likely Wrong
Here are five reasons why I think a 6.5% annual home price appreciation is unlikely.
1) Affordability is at or near an all-time low
With housing affordability at near an all-time low due to high mortgage rates and high home prices, an aggressive home price appreciation forecast of 6.5% makes no sense.
Below is a chart that highlights the US median housing payment as a percentage of median income. At ~43.2% today, the percentage is higher than it was right before home prices started declining in 2H2006.
Here’s another chart highlighting the Bloomberg Housing Affordability Index for first-time buyers. Based on the below chart, the index is at an all-time low.
2) Historical home price appreciation is closer to 4.6% per year
Since 1992, the historical annual home price appreciation has been closer to 4.6%, about 2.6% above the Fed’s target inflation rate of 2%.
If inflation rebounds to around 4%, then Zillow’s 6.5% home price appreciation forecast could come true. But over the next 12 months, CPI will likely stay below 4%.
The lag effect from the Fed rate hikes should continue to slow the economy. Therefore, it doesn’t make sense for Zillow to forecast 6.5% home price appreciation, a rate 43% higher than the historical average.
Looking at this historical nominal home price appreciation chart, a 6.5% home price appreciation through 2024 is certainly possible. However, it’s more likely that nominal price appreciation undershoots after overshooting far beyond the historical 4.6% nominal price appreciation rate.
3) Zillow is too biased to have accurate forecasts
Zillow makes more money when housing prices go up and when there are more real estate transactions. The stronger the housing market, the more real estate agents want to advertise their services on Zillow.
When the housing market is weak, home sales volume dries up, leading to a decline in advertising revenue from real estate agents and property management companies.
Therefore, Zillow is incentivized to have a more bullish bias on housing than average. Their entire business model depends on a strong and rising housing market. In fact, Zillow recently launched a 1% down program for qualified buyers.
Given Zillow’s bias towards a strong housing market, we must discount Zillow’s bullish views. We know bias exists everywhere in society – from first-generation college admissions officers accepting more first-generation applicants to 95% of Black voters voting for Obama in 2008.
We can’t help but show preference for things and people that are most similar to ourselves or help us the most.
4) Revisionist history
Years ago, I wrote you can’t trust Zillow’s estimates because I had noticed large inconsistencies. Zillow would have one estimate on a home, then completely change its historical estimates after the home was sold. By doing so, Zillow removed evidence of how wrong its estimates originally were.
As a result, I mainly use Zillow (and Redfin) to determine trends in my local real estate market. Both platforms are good resources to track sold homes, which you can then use to formulate your own price estimates.
In fact, I have a whole guide on how to use bad pricing estimates by Zillow and Redfin to get better deals. Buyers and sellers can cherry-pick favorable data given the plethora of inconsistent data to get a cheaper purchase price or greater selling price.
5) Zillow doesn’t even trust itself
Finally, when Zillow launched its iBuying business in December 2019, I was eager to see how it would do. If Zillow’s housing estimates were accurate, then Zillow would be able to buy properties at an attractive prices and later sell these properties for healthy profits.
However, Zillow’s iBuying business was a complete dud. In 2022, Zillow took a $540 million write-off (loss) and laid off over 2,000 staff because it shut down its iBuying business.
In other words, even Zillow couldn’t trust its own estimates! Most buyers who buy at the wrong price don’t just hand over the keys and file for bankruptcy. Instead, most of these homeowners gut it out by refinancing, renting out rooms, or figuring out ways to make more money.
But not Zillow. As a public company, Zillow’s main goal is to grow profits to hopefully boost its share price for its shareholders. As a result, Zillow is more focused on short-term quarterly results.
The Direction Of Home Prices In America
Going through this exercise actually makes me less bullish on home price appreciation over the next year. Instead of a more reasonable 2% home price appreciation, why couldn’t national median home prices actually decline by 5%, especially if there’s another recession?
The S&P CoreLogic Case-Shiller National Home Price Index shows national prices are flat in 2023 vs. last year. Although home price appreciation is ticking up in 2023, it could just as easily tick back down again in 2024 too.
The rate-lock effect is discouraging homeowners from selling their homes, which keeps supply low and supports prices. The main question is whether supply or demand will increase at a greater rate if mortgage rates decline over the next 12 months.
The worry for potential homebuyers sitting on the sidelines is that pent-up demand is building each month that home sale volume hovers at record lows. If mortgage rates decline, then bidding wars will likely resume, quickly pushing prices back up.
The worry for potential home sellers is that once mortgage rates decline, too many homeowners will start listing their homes and cause an oversupply situation. Builders might ramp up construction as well, creating even more incremental supply and declining prices.
My Bad Luck Will Throttle Home Prices
Perhaps the final reason why I think Zillow’s home price forecast is too high is because I’m currently trying to buy a home with contingencies. Although I’d like to think I understand real estate well given I’ve invested in multiple properties since 2003, I’ve also gotten burned before.
In 2007, I decided to buy a vacation property in Lake Tahoe for about 12% off its original sales price in 2006. I thought I was getting a great deal. Of course, the global financial crisis hit, causing the condo I bought to depreciate by another 50% at its low point!
I don’t think the home I want to buy will depreciate by a similar magnitude since it is a single-family home in a prime location as opposed to a condotel. But this single-family home could easily depreciate by another 5% – 10% if the economy tanks again.
Given my history of bad luck, I highly doubt I’ll bottom-tick this beautiful home and then see it appreciate by 6.5% a year later. Real estate down cycles often take years to play out. Instead, I’m mentally and financially prepared for my target home’s value to continue depreciating by another two years.
So Why Buy A Home Now?
I’m trying to buy now because I’ve identified the nicest home I can afford. I’ve got 12-15 years before my kids leave home, so I figure why not go for the upgrade when prices are down.
There is a lull in demand due to high interest rates. Meanwhile, the higher the price point you go, the better deals you can usually get. I’d don’t want to get into a potential bidding war if mortgage rates decline in the future.
I’d love for Zillow to be right about its housing price forecast. But based on its track record, I think Zillow will be wrong like Donkey Kong again.
Reader Question and Suggestions
What do you think of Zillow’s housing price forecasts of 6.5%? Where do you think the national median home price will go over the next 12 months?
If you want to leg into real estate more slowly, as opposed to buying a property with a mortgage, check out Fundrise. You can invest in a Fundrise fund with as little as $10. Fundrise primarily invests in residential and industrial properties in the Sunbelt, where valuations are lower and yields are higher.
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