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Continued economic growth in the face of cooling inflation may yet produce the “soft landing” that Fed policymakers have been shooting for, but the stark affordability crisis created by rising home prices and mortgage rates may continue to frustrate many would-be homebuyers for some time.
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That’s the view of a number of housing industry economists in a nutshell — including Orphe Divounguy, a senior economist on Zillow’s economic research team.
But unlike many economists, Divounguy — who earned his doctorate from England’s University of Southampton — has some advice for agents on how to bridge what he sees as the “big disconnect between buyers and sellers” in many markets.
Speaking to real estate agents and brokers attending Inman Real Estate Connect Las Vegas on Tuesday, Divounguy noted that first-time homebuyers “are essentially renters,” who saw their housing costs increase by about 33 percent during the pandemic while their wages lagged. He said about half of all renter households are cost-burdened by housing, meaning they’re spending 30 percent or more of their income on rent.
“Some of them are spending 50 percent of their income or more on rent, which doesn’t leave much for anything else, let alone saving for a down payment, right?” Divounguy said.
Contrast that with what happened to potential sellers, who thanks to rising home values are sitting on “near record home equity” and also saw their monthly payments decline in real terms during the pandemic, Divounguy noted.
One example of how bad the affordability situation has gotten is that in Los Angeles, a renter earning the median income could need to come up with a $780,000 down payment in order to buy a house with a monthly mortgage payment equal to 30 percent of their income.
“And so you have kind of a ‘haves and have not’ situation, where potential sellers are in a very comfortable position, whereas potential buyers are not,” Divounguy said. “I think agents have to begin to stress the magnitude of the affordability challenges that are out there.”
Agents can help would-be buyers by pointing them to affordability hacks like down payment assistance programs, or a “BuyAbility” search tool Zillow rolled out in May that shows how ups and downs in mortgage rates affect their options by filtering for homes that fit their budget.
The BuyAbility tool, “basically allows the agent or the potential first-time homebuyer to put in their credit score, and the tool will actually show you the likelihood that you can afford the payment on the home you’re looking at on the Zillow map,” Divounguy said.
“Zillow also has down payment assistance programs on every single listing,” he added. “That’s a great tool to use, especially in those markets where the down payment is really out of reach.”
When it comes to sellers, Divounguy said it will be up to agents to bring those with unrealistic expectations about what the market will bear back down to Earth.
“How many of us know of a seller, a prospect that wanted to list their home for tens of thousands, if not hundreds of thousands of dollars more than similar homes that were selling in the neighborhood, right?” he quizzed the audience. “I think working with sellers to help them appreciate the magnitude of the affordability challenge is going to be important, and there are great tools that agents should lean into.”
Agents should think of technology as their ally in working with sellers, “Right from pinning down the right list price to 3D home tours and virtual floor plans that will help you sell the home faster and deliver more value,” Divounguy said. “I think that’s really how we get the job done.”
Economists at Fannie Mae and the Mortgage Bankers Association predict national home price appreciation will cool by half next year, to around 3 percent by the final quarter of 2025. Zillow’s latest forecast envisions a more abrupt deceleration, with home prices rising by just 1 percent during the year ending in June 2025.
That means home prices are likely to come down in some markets where buyers don’t snap up homes as fast as they come on the market — a trend that’s already starting to emerge in a handful of Sunbelt markets.
Zillow data shows home prices continued to appreciate in 46 of the 50 largest metro areas in June, with San Jose, California (12 percent), Hartford, Connecticut (10.5 percent), San Diego (9.4 percent), Providence, Rhode Island (7.7 percent), and Los Angeles (7.6 percent) leading the way.
But Zillow reported home values were down from a year ago in June in four markets where supply exceeded demand: New Orleans (-6 percent), Austin, Texas (-4.6 percent), San Antonio, Texas (-2.7 percent), and Birmingham, Alabama (-0.6 percent).
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