The Zillow August 2021-August 22 forecast:
Zillow expects home values to grow 11.7% between August 2021 and August 2022, and to end 2021 up 19.9% from December 2020.
The September 2021-Sep 22 forecast:
Zillow expects home values to grow 13.6% between September 2021 and September 2022, and to end 2021 up 19.5% from December 2020.
The 10-year mortgage rate is about 2 percent. If Zillow is right, even for someone who wanted to live in a place for only one year, it would be cheaper to buy a house, pay the cost of capital, pay property tax and insurance, and pay a realtor 5 percent at the end of the year to sell the house than to pay rent (since the preceding scenario will yield at least a small cash profit).
So…. either (1) everyone who rents is stupid, (2) nobody who rents can qualify for a mortgage, or (3) Zillow is wrong about where the price of a house to purchase is going.
(Since we are renters and I am stupid, I am going to bet on Explanation 1!)
Note the pasted-on price adjustment in the chocolate alligator for sale below (PBI):
- “Accelerating Inflation Spreads Through the Economy” (WSJ, 10/13)
18 thoughts on “If Zillow is right about inflation, is everyone who rents stupid?”
From the start of corpnapanic my home paper value grew about 28%. I think their actuaries made some models, I am sure they constitute Zillow IP and will not be disclosed
I can make the following observations:
1. For the greater Portland, OR area – Housing prices have gone up significantly faster than inflation, but Zillow seems to be over-estimating. In particular I own a condo in a complex where several directly equivalent properties have recently sold for quite a bit less than the Zestimate for my property.
2. The stock market has still appreciated faster than housing prices over the past two years.
3. I think your third statement is probably controlling, not that many people can qualify for a 10 year mortgage. Especially on a property they want to live in. That is, the 10 year mortgage is going to have a pretty high monthly payment. If you are looking at properties now, they appear quite overpriced compared to a year ago so even if interest rates are quite low the monthly payment on a place you actually want to live in is going to be high and that much more so if finance it on a 10-year note.
4. Rent in a depressed area! Thanks to the social unrest, my current landlord (I own a condo I rent, and I rent an apartment I live in) offered me a month of free rent to promise to stay another year. At the end of the day, many downtown areas, are still desirable to live in if urban environments are your cup of tea.
5. Real-estate is an illiquid investment with high-transaction costs and which requires continuous investment (taxes + maintenance). If it didn’t have the practical benefit of being able to live in it or the tax benefits of depreciation (if you rent it out) I don’t think it would make any sense.
My suggestion: If you can borrow money at 2%, borrow all you can and then invest it in the stock market. If nothing else, 2% is clearly significantly less than the current rate of inflation.
I considered this, but can’t borrow at that rate. A year ago, I was able to get a HELOC at prime + 1.5%.
My paper value is based on real sale prices in my area and if anything Zilow underestimated house price growth in my area over time
But it is volatile: my house paper value was over 40% higher during mid – 2020, then came down to about Zillow estimates for growth and for the past 5 month is higher again.
Isn’t Zillow one of the largest homeowners in the US (and also no longer buying homes as of today)? Interesting.
https://www.wsj.com/articles/zillow-says-it-cant-buy-any-more-homes-this-year-11634574144 says you’re right! They say that they had to stop because they can’t find anyone to work (but if they believe their own forecast, the houses should soar in value even without renovation):
Zillow said it has stopped the practice because it was experiencing backlogs related to renovating the homes and that it faces constraints for on-the-ground workers.
“We’re operating within a labor- and supply-constrained economy inside a competitive real estate market, especially in the construction, renovation and closing spaces,” Chief Operating Officer Jeremy Wacksman said. “We have not been exempt from these market and capacity issues.”
I realize now that a stronger formulation of the original post could be made. If Zillow is correct, all of Wall Street should be buying houses, renting them to cover property tax and maintenance, and then selling them a year later for an 8 percent profit (after paying 5 percent real estate commission). Unless there is a lot of risk that Zillow hasn’t told us about, that’s a great return on investment, especially if you’re a big institution and can borrow money for less than 2 percent.
How does a wall street firm rent out a house when the government can just decide to cancel rent? The tenants could stay many years for free! Here in sunny Los Angeles we are on our 23rd month of an eviction moratorium with no end in sight.
How many potential buyers are there that were just about to qualify for a house as houses skyrocket in price? Everybody that wants a house and can afford one or a handful of houses, already has theirs. I’m going with the official story is usually wrong and the pop is near.
You might be right about all renters being stupid except for those who chose to live in cities like with draconian rent control schemes, like Santa Monica, San Francisco etc. which only allow the rent to be raised by less than 1% regardless of inflation.
The only reason buying could be superior to renting is if you can actually survive in Fl*rida for more than a few months instead of moving back to Boston. The lion kingdom expects the Fl*rida experiment to end in tears.
Our convertible arrived yesterday, so we hope to be thriving in Florida, not merely surviving! The truck transporting the vehicle from New England (we’d ordered it from a dealer in Rhode Island back when we lived in Maskachusetts) contained two Ferraris. Apparently there are plenty of people with money and flexibility who have decided that Florida is better than New England. I wore shorts and a T-shirt this morning to walk Mindy the Crippler. Encountered not a single bug. Temps in the 40s back in suburban Boston this morning and, if I had gone on a walk up there I would have needed to douse myself in DEET to prevent ticks from attaching themselves to my bloodstream.
FL Today, 10/19/21 -This year’s 25 best places to retire have been ranked, and 11 of them are in Florida
The 25 best places to retire in 2021-22
3. Daytona Beach
5. Lancaster, PA
7. Fort Myers
8. Port St. Lucie
9. Ann Arbor, MI
11. Allentown, PA
13. Harrisburg, PA
14. Asheville, NC
15. Reading, PA
17. York, PA
21. Scranton, PA
22. Raleigh & Durham, NC
23. Nashville, TN
24. Manchester, NH
25. Myrtle Beach, SC
Phil G, If you think what is going on in the USA right now is red state v blue state, I have a couple bridges for sale.
Janice: I’m not sure that I ever said that or anything like it! I do think that there is a battle between people who live in cities and benefit from a larger government and those who live in exurbs/rural areas who are harmed by a larger government (higher taxes and no increase in building, services, etc.). I wrote about this in https://philip.greenspun.com/blog/2021/07/18/what-will-rural-american-taxpayers-get-in-return-for-spending-on-infrastructure/ (“In my view, the biggest financial implication of the Biden/Harris victory is the transfer of funds from rural Americans to urban Americans. Big Government spends nearly all of its money in cities so a bigger government accelerates the process of looting from rural Americans to enrich those who live in cities, e.g., with free public housing, improved transportation systems, fancier hospitals, etc.”)
Since lion, above, was talking about Florida, let’s look at Florida. The cities voted for Biden (bigger government) and the rest of the state voted for Trump (smaller government). https://mcimaps.com/how-floridas-congressional-districts-voted-in-the-2020-presidential-election/
People in Tallahassee, where paychecks come directly from the government, were big enthusiasts for a bigger government: https://www.tallahassee.com/story/news/tlhelections2020/2020/11/07/tallahassee-voters-florida-democrat-republican-liberal-conservative-universities-state-workers/6191215002/
On the whole, he explained, government workers want better pay and expansion of government programs, perhaps to make room for promotions.
“And they feel that the Democratic Party is more likely to support government programs and to bring in more money into state government, while Republicans do not,” Jewett said.
People in the real estate business are always optimistic about expected returns to real estate. They are nothing more (or less) than touts.
Every real estate agent: “It’s always a good time to buy real estate…and to sell real estate.”
Don’t know where Zillow’s insights come from, but if one thinks inflation will be around for a while it is probably a good idea to buy assets rather than hold cash. Stocks, commodities, real estate, etc. Though there are lots of publicly traded real estate so if you think real estate is the place to be not clear why you need to go to the bother and take the risk of buying/selling a home. Something to consider is that the break even rate on 10 year treasuries/tip is about 2.5% — which seems to indicate that that market sees that what is going on now is mostly noise. And, this number has been trending up this year. Time will tell.
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