Tony:
Rookies, as we know now is the time that everyone is looking ahead to 2025, what’s in store for the real estate market? Well, today we’ll be sharing an episode from On the Market podcast to help you have a clear idea of what 2025 will be like. Will mortgage rates finally fall below 6%? Will home prices dip with housing inventory up a substantial percentage year over year? Well, let’s find out On today’s episode,

Dave:
It is officially prediction season, and today’s guest is someone who never takes his eyes off the data. Mike Simonson of Altos Research is here to give us an update on the housing market as we close out 2024 and give us a preview of what he anticipates for the coming year. Hey friends, it’s Dave. Welcome to On the Market, the Real Estate News and Economic Show where we like to have some fun while keeping you informed. And I truly love asking people to make predictions because no one likes doing it, but it’s kind of fun. And even though no one is ever always right with these predictions, I do think it is helpful to hear how people are thinking through these unknowable questions about what’s going to happen in the coming year. And in today’s episode, Mike threw out a prediction on mortgage rates without me even asking, and he put some great logic and thinking behind it and I think it’s going to help you all forecast what might happen in the year to come. So with that, let’s bring on Mike. Mike, welcome back to On the Market. Thanks for joining us,

Mike:
Dave. It’s always great to be here.

Dave:
Yeah, it is a pleasure to have you back. Always one of the most informed analysts and watcher of the housing market that we can have. So this is going to be a treat. We are Mike, of course, winding down 2024. So let me just start by asking you, did this year shape up how you were expecting it or did anything surprise you in the housing market in 2024?

Mike:
I think anybody who was in this spot a year ago talking about 2024, we were consistently surprised that mortgage rates stayed as high as they did for as long as they did.

Mike:
There were a lot of folks in the beginning of 24 that thought mortgage rates would be in the fives during the year, and we were in the upper sixes in the sevens as back up in the sevens now. So as a result, home sales did not pick up all year long and we’re really two and a half years in almost three years into the dramatic slowdown in the market. So that was a surprise and there were impacts other things that happened there. So sales were lower. We knew that inventory would grow this year, but it grew more than expected. The other side of the surprise for me for the year was that we are in a world where mortgage rates are higher, where supply is higher, where demand is lower, and yet home prices didn’t decline, so home prices stayed higher as well. And so I’d say that was a surprise

Dave:
For sure. Yeah, I was a bit surprised by the strength of appreciation. I actually, I’m wrong all the time. I’m not trying to brag. I actually didn’t think mortgage rates were going to come back down, but I did think that that would cause more of a moderation in home price appreciation than we saw as of last readings. We’re still up 4% year over year. That’s higher than the long-term average. So there were a lot of surprises here. So maybe we can just break these down one by one. Mike, you talked a bit about inventory, which has been on all of our minds for the last God five years now. But tell us, you said that inventory went up faster than you’re expected. Can you give us some context? Where does inventory sit right now? How does that compare to historical context? What’s the trend?

Mike:
Yeah, so there are, as of well, we’re recording this 722,000 single family homes on the market unsold around the us. That is 27% more than last year at this time. Wow. So it’s a pretty significant year over year gain. As of September, late summer, I guess we were 40% more homes than a year prior. So that’s a pretty significant gain. So I was expecting the year to peak at about 700,000 homes on the market. I think we peaked around seven 50

Mike:
When we’re looking at single family homes. And that was really a result of slower demand through all the way through the first, the second quarter into the third quarter because rates were stubbornly high and there was never a moment of reprieve until middle of September. Mortgage rates came back down close to 6%, a little head, fake of demand, a little window. So inventory wise, we’re looking at 27% more homes on the market. One of the things that’s interesting about inventory right now is the inventory growth is really concentrated in the south and the Sunbelt states and inventory in places like the Midwest, like Illinois or Ohio or even in the northeast, New York, pretty much every place has more homes on the market now than a year ago. But some places like Illinois, it’s only a little bit. And so Illinois or Ohio have just barely more homes unsold than during the pandemic

Mike:
Where Austin, Texas is at a 15 year high. And what happened there? So we have this bifurcated market. The northern half of the country has still has pretty restricted inventory. The southern half of the country has much more available inventory, and as a result, prices are soft. The reason that that’s happened is a migration pattern. So for years and years we’ve been moving from the north to the south. You sell your house in Illinois, you buy it in Texas or Florida. And in the last two and a half years, three years, as interest rates rose, we stopped moving. And so that migration pattern is on hold. And so we’re not selling our house in Chicago and buying it in Dallas. So the inventory that we used to buy in Dallas is building up and the stuff we used to sell in Chicago is not available. So you get this real bifurcated market around the country right now.

Dave:
Interesting. Okay. Well let’s dig into a couple of those things. First things first, inventory can rise basically for two reasons and just for everyone listening, if you’re not familiar, inventory is the amount of homes, properties on the market at any given point. And so you can have inventory rise because more people are listing their properties for sale. That’s called new listings. So you can see new listings increase or inventory can also rise from a decline in demand. Maybe the same amount of new listings are hitting the market every month, but because they’re not selling as quickly, they sort of compile and stack up, and that means there’s more things on the market for sale. But Mike, it sounds like at least in broad strokes on a national level, the reason that inventory has risen faster than you were expecting this year is because of a lack of demand, not because more people are selling their properties.

Mike:
I think that’s exactly right and it’s a good insight. When we look at really low transaction volume and we look at the market, we say, wow, demand’s really low. We talked about expecting home prices to fall because demand is weaker. The observation is that in a world where in the supply demand equation, demand falls, but supply is pretty, that the new seller supply remains restricted than that creates an environment where it’s harder for home prices to fall. Where if we have both of those sides, we have more sellers and fewer buyers,

Mike:
That’s really when we create that imbalance. And so we watch for that every week. And the Altos data, we’re tracking the new listings. And so the new listings volume is about seven 8% more than last year at this time. So it’s growing a little bit each week. There are a few more sellers, but there’s not a lot of sellers and there’s still a lot fewer sellers each week of a lot fewer new listings each week than say in 2019 or 2018, like the previous decade by maybe tens of thousands of people every week fewer sell their homes now. Great. Thank you for

Dave:
Clarifying that. Okay, so that’s where inventory and new listings stand today, but what is going on with those regional differences Mike mentioned and how long does Mike predict rates will stay this high? Mikes in after the break. Hey friends, I’m here with Mike Simonson of Altos Research and we are talking about what we expect from the housing market in 2025. You said something else in an earlier reply, Mike, about migration, and I just wanted to get your thoughts on this. You said specifically that migration pattern is on hold, and we did see, of course during the pandemic, a lot of people moving from the west or the Northeast or the Midwest to the southeast or to the Sunbelt basically saw the biggest in migration. You said it’s on pause. Does that mean you think that this is temporary and that if affordability gets restored sometime in the future that we’ll see a resumption of that migration pattern?

Mike:
I think it’s temporary and of course temporary. It’s like three years in now, but it’s still temporary. And the reason I say that, it’s a phenomenon that I call the great stay, and we can see it in housing, we can see it in the migration patterns, we can see it in the inventory where we’re not selling in Chicago and buying in Texas or selling in the Midwest and buying in Denver. Those have slowed down. And if you study the migration, the folks who study migration specifically actually point out that places like Austin had negative outbound migration in the last year,

Mike:
And a lot of the Western Florida markets had outbound migration actually negative flow. But that great stay is also, we see it in the labor market. So if you pay attention to labor market, you’ll know that the unemployment rate is very low. But if you look more closely, you’ll see that companies aren’t hiring very fast and people aren’t quitting their jobs at rates. So normally when unemployment’s low, people quit their jobs a lot because they can go get a new job really quickly, but they’re not quitting their jobs because companies aren’t hiring. And so employees, I’ve got a good job and I don’t want to mess that up and I’m not moving. So we’re not moving across town, we’re not moving across the country, we’re not quitting our jobs, we’re not hiring as many people. I’m sitting still, and so that great stay is underway.

Mike:
So I think that that slowly transitions out. And I think as the economy changes and maybe interest rates come down, whether it’s mortgage rates or the other interest rates, that frees up companies to hire more. So now if they’re hiring like, oh, they are hiring in Austin, so I will quit my job in Chicago and resume that move. So I think it’s temporary, but like I said, it’s been three years and in the housing and when we look at inventory, I think it’s probably two more years of higher mortgage rates before we get to the old normal levels of inventory on the market.

Dave:
That makes sense. So I’m just trying to follow this. I’m not saying I disagree with the presumption that migration will accelerate again, but the way I keep about it is there was always migration pre pandemic, and it wasn’t that dramatic. People moved all the time and the southeast was growing, but in some ways I feel like, okay, maybe even when affordability gets back, migration will resume, but it’ll go back to sort of pre pandemic levels. Is that what you’re saying? Or do you think this super rapid migration that we saw during the pandemic, that level of activity will resume?

Mike:
Yeah, I think the pandemic was a unique phenomenon, right? It was ultra cheap money and no offices and it was at an ideal time to move. So I don’t think we get back there without some kind of crazy crisis. But I do think our general patterns, it’s pretty nice to move. If you live in Chicago in February, it’s pretty nice to move to Phoenix. There’s a lot of appeal to that. And when you don’t have to worry about getting into job in Phoenix, then you move.

Dave:
All right, well, the great stay, I like the marketing of that. We’re going to have to keep an eye on that.

Mike:
I could see the impact happening in housing, which I watch, but then I would also talk, I would watch labor economists talk about this similar thing happening in the jobs market, and I thought, wow, that’s the same phenomenon and that’s why I called it the great state.

Dave:
Yeah, people are stuck right now just in general. They’re just because yeah, low affordability, man. I keep trying to get to my next question, Mike, but you keep spilling more hints that I need to follow up on. So you mentioned that you think it would take two years of higher interest rates to get back to normal levels of inventory. Number one, does that mean you think rates are going to stay relatively high?

Mike:
I like to say that I don’t predict mortgage rates. I’m not sure. I’m not convinced that anybody can.

Dave:
No, I don’t like to.

Mike:
Yeah, I mean I’ve been wrong on mortgage rates for 30 years, but we can look at things and there are things that dial in to what we know about mortgage rates for the coming year. And in fact, at HousingWire, we just published at 2025 comprehensive housing market forecast. So we put these assumptions about mortgage rates in there. Mortgage rates move in tandem with the 10 year treasury yield. And that in the last couple of months has been climbing the interest rate on the 10 year treasury has been climbing as the economy has stayed hotter, the signals on the employment market, like I said, has stayed lower than expected. Now we have Trump coming in and the market is viewing the Trump policies as inflationary. So all of these things are conspiring to keep interest rates higher for now. And so we’re rolling into 2025, around 7% that is at the high end of the range that I expect for the year. So we imagine a world where economy slows a little bit, we have a little bit more unemployment, so we’ve been on such a tear with the economy that slightly eases down and that allows interest rates to fall a little bit in 2025. So in the 6% range,

Dave:
That seems pretty like what most watchers are predicting.

Mike:
And then the wishful thinking is like does it get down into the fives or the low fives? And the only way we could see that happening is if we have a major recession hit or some kind of real crisis hit that abruptly slows the economy and you can’t predict those. But assuming that doesn’t happen, we have slowing economy not accelerating from here, which would push rates higher. We have slowing economy, gently slowing economy that would ease those back down and keep the rates in the sixes. So we can see in our housing wire forecast, I could imagine moments in 2025 where rates dip under 6%. We got close to that this year and maybe you get a handful of those weeks where it dips under 6%, but mostly stays 6.75, 6.5, 6.75 if rates stay close to seven for the year or above seven, we’re going to revise things down. We’re going to assume fewer purchases. We’re going to say inventory builds, like all of our forecasts get revised down if rates surge above 7% for any length of time.

Dave:
Yeah, I mean I think that makes sense and I appreciate how you caveat that because when people ask what rates are going to be next year, the year is a really long time. You see in this past year’s data, we’ve had rates close to eight, we’ve had rates close to six, there’s big swings there. So I appreciate you saying that there’s probably going to be volatility. I keep cautioning people that even if rates are on a general downward trajectory, which is the consensus view, that it’s going to be a rocky road down, things are going to go up, they’re going to go down. I would personally expect a lot of volatility in the next year. But Mike, given what you just said that you think rates will stay in the sixes for the most part next year, you did say that you think inventory would grow back over the course of two years. Is that because you think with rates that high demand is going to stay out of the market?

Mike:
Yeah, I think the rule of thumb is higher rates leads to higher inventory, lower rates leads to lower inventory, and you can see that during the pandemic rates dropped dramatically and inventory dropped dramatically. Then in the three years now post pandemic rates climbed and inventory climbed, you can see that relationship pretty clearly. And so in a world where rates say in the sixes now that’s higher than most Americans have homeowners already have on their existing mortgages, so call that high mortgage rates. And so that implies that inventory will keep building. And so I expect we called it 17% inventory growth for next year. So we grew 27% this year and growing maybe 17% more next year. And I don’t see a bigger surge than that unless, like I said, you get those conditions where we’ve been expecting for two years that rates would ease down and then they go the other way. So those scenarios could happen, although I don’t expect them to happen.

Dave:
Thank you for clarifying that and you’re beating me to some of my questions about 2025, but we’ll get back to that in just a minute. But before we do, I wanted to ask you about just some hyper recent data since you look at inventory transaction volume on a week to week basis. We are recording this, what is it, the 19th of November today. So we’re two weeks after the presidential election, and a lot was made leading up to the election that people were sitting on the sidelines. I read a survey on Redfin that said 25% of prospective home buyers were waiting until after the election. I think there was some data that supported that. Mike first, did you see that slow down? And then since the election, have you noticed any changes in inventory or transaction volume?

Mike:
We noticed election week a dramatic dip. People didn’t do anything that week, and they rebounded a little bit in the last week. So slightly more sellers, a tiny uptick in inventory. It was about 7% more transactions happened in the first week after the election. And so a little bit of uptick, and I expected that as well, and it was not in fact as big an uptick as I expected.

Mike:
And when you think about those folks in that survey who said, I’m waiting until after the election, a lot of folks were thinking, I was talking to a friend this weekend who said, my mortgage guy told me to wait to refinance till after the election. And so he didn’t grab his 6%. He bought his house a year ago and he didn’t grab it when rates dipped down to 6%. He didn’t do his refi. He was waiting till after the election. What he didn’t realize was that suddenly after the election, now rates are even higher. So he’s still waiting. And so he waited till after the election and now he’s got to wait till next spring and maybe there’s another turnaround, a dip in rates before he can refinance again. So I expect that there’s that kind of thing happening

Dave:
Where people just thought basically after the election, one way or another rates were going to go down,

Mike:
Maybe they go down and like I said, it’s really hard to forecast mortgage rates, so who knows what is actually going to happen. But I could imagine that folks were thinking that, and what we turned out is we haven’t yet had better because money got more expensive.

Dave:
Yeah, I agree. I think even though people might be more enthusiastic or more be able to even just devote more mind share to the idea of buying a home or buying an investment property after the election, the reality is that rates have just really gone up a lot in the last two months. In September, they’ve gone up pretty much a hundred basis points. And so even if you were waiting, I don’t think there’s a lot in just actual dollars and cents that would say, Hey, now the election’s over, you should go buy a house because it’s still way more expensive than it was two months ago.

Mike:
Yeah, I think that’s exactly right. And so we actually saw an acceleration of demand and actually prices in that little September window when rates got closer to six,

Mike:
We didn’t see it when rates were at six and a half. They’d come from seven and a half down to six and a half, and we didn’t really see any acceleration yet. We did see it at closer to six, and then now we’re back up towards seven. So when we look at the spring, for example, if rates happen to ease back down closer to six by the spring, that would be very bullish for home sales in the spring vary. It’d be bullish for, we will see more transactions you’d see, and if they dip far enough fast enough, you could actually see inventory fall and not grow year over year. If we get lucky on the cost of money, it’d be lucky for those who are financing. It’d be unlucky for those who are competing for fewer homes again,

Dave:
For sure. Yeah, that’s a good way to put it. All right, time for one final break, but when we come back, what are the big questions on Mike’s mind as he looks to 2025? Stick with us. Welcome back to On the Market. Let’s jump back in. Let’s turn our attention to 2025. You’ve told us a little bit about what you think, but maybe just tell us the big themes. What are you most eager to watch as we enter a new year?

Mike:
So the big theme for 2025 is the question, are we finally going to grow home sales? Are this number of transactions finally going to grow now for the consumer? Consumers care about home prices? Are my prices going to go up? Are prices going to go down? But for the economy and for the industry, the number of transactions really matters.

Dave:
Absolutely.

Mike:
And it’s the number of transactions that got pummeled this cycle post pandemic. And so a normal year of home sales might be 5 million home sales. We got up over 6 million during the pandemic and now we’re down at 4 million. So a third fewer home sales in the last couple of years. That’s dramatically fewer.

Dave:
Yeah. Yeah. I keep telling people that. I think a lot of people who aren’t in the industry, like you said, just look at prices, but a lot of our audience here on this podcast are real estate agents who are loan officers, who are people who depend on transaction volume for their livelihood. And I think for those people, and just for investors and people who watch this market, the shift has been really dramatic because a normal year, even before the pandemic was over 5 million. And so even if we were comparing this year to pre pandemic, it would be a pretty dramatic decline. But all of a sudden when you just look back at recent history, we’re sort of riding at near all time highs over 6 million. And now to see that fall so dramatically, it just feels like extreme whiplash. And I’d also imagine a lot of people jumped into the industry in 2021 and 2022 because it was so beneficial, and now there’s just way fewer deals and transactions for perhaps a bigger amount of people relying on those transactions for their livelihood.

Mike:
That’s exactly right. So when we look at 2025, the question is, are we finally going to grow home sales? And if so, by how much? The question on prices is less compelling right now, because as we can see, even though the transaction volume fell by a third in the last couple of years and stayed low for two and a half years, even though that happened, home prices kept ticking up in most parts of the country. But let’s start with the transaction volume. So it’s really been two and a half years of low transactions right now at two full years, 23 and 24 at about 4 million a pace of 4 million home sales. Then the question is, will it finally grow next year? And if so, by how much? The way we look at it is we expect home sales to grow by about 5% in 2025, so that would be about 4.2 million home sales.

Mike:
So a little bit of growth, not a ton of growth, but also not staying like we’re going to get some growth. Finally, and the reason it looks like about 5% growth is that we can stop buying houses very quickly, like we go to six to 4 million sales very quickly, but it takes more years to ramp up that demand again. So there are very few years where home sales grow by 10% or more. So if you see folks like I think NAR maybe had a said 4.9 million home sales for next year, and I just can’t figure out how the market could grow by 25% or 20% in one year without some kind of crazy government program. But we can see 5% growth, and that implies some stability in mortgage rates. So we’re assuming that mortgage rates stay in the sixes, so we’re looking slight growth, 5% growth, 200,000 more sales in the year, and then you do that again the next year, and that’s how you grow the industry back to its normal pace is over a multiple years. So that we’re just talking transaction volume, so go from 4 million to 4.2 million.

Dave:
Okay. But you just alluded to, you’ll say prices. So what do you think will happen for prices

Mike:
If you think long-term? Normal price appreciation is about 5% a year. Home prices tend to grow about 5% a year over the many decades because the economy grows, population grows. We under build home prices tend to grow about 5% per year. And in fact this year 2024, they’re coming in right about four or 5%. We think for 25 we will underperform the long-term average. So we do about three and a half percent home price growth in 2025.

Dave:
Okay.

Mike:
And now we don’t see scenarios outright home price declines nationally, unless we get into some wacky real extreme things with mortgage rates, transaction volumes fall back way down. That could drive supply up demand down, and that could drive home prices down, but we think the likely scenario is about three and a half percent home price growth for the year next year.

Dave:
Got it. All right. Well, thank you, Mike. That’s super, super helpful. Before we get out of here, is there anything else from all the research you do that you think our audience should know heading into next year?

Mike:
I think the real interesting one to watch is that new listings volume each week, because a couple of things need to happen. We want to see if we’re going to see 5% more sales next year, we need to see more listings next year. We need to see more sellers, and so we need to watch that number go up. On the other hand, if that number spikes, let’s say people get freaked out about losing their job and they start selling their homes. Investors want to get out before some crash happens, whatever the phenomenon is, distressed sellers, and suddenly we go from say, 60 or 70,000 new listings for single family homes. Each week we go to 70, 80, 90,000. If it goes back above the old normal levels, then we talk about that supply is up, demand is down. Those are the scenarios where prices could go down, like even crash next year. So the cool one to watch is that new listings volume each week because it really helps us confirm any hypothesis we might have about the market for next year.

Dave:
Great. Well, Mike, thank you as always. This is always a enlightening, fun conversation. We appreciate your time,

Mike:
Dave. It’s my pleasure.

Dave:
If you want to file Mike and his research, we’ll link to his work in Altos and Housing wire below, so make sure to check that out. And thank you all so much for listening to this episode of On The Market. We’ll see you next time.