As a homeowner and someone who invests in real estate, I’m always hoping for a rise in home prices and rents. This is a key part of my strategy to generate a steady six-figure passive income. So, when I saw Zillow’s latest predictions for housing prices, I was pretty excited. They’re saying that national home prices will go up by 6.5% by July 2024. This seems a bit too optimistic, especially considering the current high interest rate environment. They’re basing this on factors like lower mortgage rates, a shortage of supply, and a soft economic landing.
If you’ve got a 20% down payment 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 impressive return. But after a moment of feeling good about my real estate portfolio potentially increasing in value next year, I had to face reality. Zillow has a track record of getting it wrong when it comes to predicting housing prices. I don’t think this time will be any different.
Since I wrote this post, Zillow has already changed its 2024 housing price forecast a couple of times. Now they’re saying that U.S. home prices will rise this year, with an increase of 3.5% between December 2023 and December 2024. If that happens, it would mean that national home prices in 2024 would see almost the same growth as in 2023, which was 3.2%.
Zillow has also provided a map showing their home price forecasts by region. They’re predicting that home prices will rise by 2% to 10% in every state except for three regions in Louisiana. Back in a May 2, 2023 post, I also said that I thought there was potential for real estate prices to go up. So maybe Zillow and other institutions are starting to see things my way? I just think 6.5% is too high by at least two percentage points.
Here are five reasons why I think Zillow’s home price forecast is likely wrong:
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Affordability is at or near an all-time low. With high mortgage rates and high home prices, a 6.5% increase in home prices just doesn’t make sense.
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Historical home price appreciation is closer to 4.6% per year. Since 1992, the annual home price appreciation has been about 2.6% above the Fed’s target inflation rate of 2%.
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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. So they have a vested interest in a strong housing market.
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Revisionist history. I’ve noticed that Zillow often changes its historical estimates after a home is sold, which removes evidence of how wrong its estimates originally were.
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Zillow doesn’t even trust itself. When Zillow launched its iBuying business in December 2019, I was eager to see how it would do. But it was a complete failure. In 2022, Zillow took a $540 million write-off (loss) and laid off over 2,000 staff because it shut down its iBuying business.
After going through all of this, I’m actually less optimistic about 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 that national prices are flat in 2023 compared to last year. Although home price appreciation is ticking up in 2023, it could just as easily tick back down again in 2024.
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.
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-to-three years.
So why am I trying to buy a home now? Because I’ve found 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. I’ve convinced my wife to move and the kids love the home as well.
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 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. I did some housing price analysis and it sure seems like bidding wars are back in 2024. But based on its track record, I think Zillow will be wrong like Donkey Kong again.
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