Tale of 2 housing markets will linger into 2024, Zonda economist warns


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Last year, a tale of two housing markets unfolded across the United States, with existing-home sales hitting their lowest level since 1995 and new-home sales growing by 11 percent.

Expect a similar story to play out this year, Zonda Chief Economist Ali Wolf said Thursday during a morning session at Inman Connect New York, with would-be homebuyers in many markets continuing to find that listings are in short supply.

“We’re dealing with an affordability shock,” Wolf said at the Hilton Midtown. “We’re still dealing with consumers that are sidelined. We are in an election year with lingering economic uncertainty. It’s not going to be an easy year.”

After giving a high-level view of the economic backdrop — having dodged a recession last year, the economy has been moving in the right direction — Wolf talked about the state of housing markets around the country, who’s buying, and challenges facing the industry.

“I’d say the biggest thing that I learned last year is that while we did have sales at the lowest level since 1995, we still had over 4 million homes sold,” Wolf said. “Those are still 4 million transactions that you could have had your share of. So it’s understanding the consumers out there today. Why are they buying and what do they want? That’s the most important thing I can give you for success throughout this year.”

Since peaking in October, mortgage rates have retreated from 2023 highs and applications for purchase loans have been trending up. The bad news is that “doesn’t change the reality that what is happening with home prices and affordability is absolutely playing into total sales,” Wolf said.

“We know people are saying, ‘Do I really want to buy that home at that price?’ And a lot of it comes down to inventory. There’s been lots of discussion at this conference about inventory. To us, this is the absolute number one most important thing to watch this year.”

Of course, the story varies considerably by market.

“If you’re operating in Austin, Salt Lake City, San Antonio, San Francisco listings are actually above where they were pre-pandemic,” Wolf noted. “If you’re in Nashville, Phoenix, Tampa, Orlando, we’re just modestly below the level of pre-pandemic times. But markets like Baltimore, here in New York, San Diego, Detroit, Vegas [listings] are down 40 to 50 percent.”

Zonda is a housing data and consultancy firm that tracks the building lifecycle of new homes, from raw land to the closing out of new home communities, Wolf said. The company’s Zonda Market Ranking (ZMR) tracks the pace and volume of new home sales in individual markets, ranking them from “significantly underperforming” to “significantly overperforming “relative to historical activity.

How new home markets are performing

ZMR December 2023

Source: Zonda Market Ranking, December 2023. 

Pulling up a U.S. map of Zonda Market Rankings, Wolf said, “I want to call to your attention the green dots, in particular the dark green dots — if you’re in Vegas, if you’re in Chicago, if you’re in Tampa, you can see these are over-performing markets. You may say it doesn’t feel like the market is so easy … but the important thing about the ZMR is we do not care how sales are secured.”

Zonda’s builder surveys show more than 60 percent of new home projects across the U.S. are offering incentives including flex dollars that can be applied to closing costs or mortgage rate buydowns, she noted.

“If we’re seeing market interest rates in the high sixes, low sevens, builders today are offering rates in the high fours to high fives,” Wolf said. “This really helps us to make sense why there are these two different markets emerging.”

(Guaranteed Rate recently launched a new product, RateReduce Sell, aimed at helping existing home sellers compete with new homes by allowing sellers to pay points to lock in a discounted rate on a permanent buydown. Seller’s agents can cite the discounted rate in co-branded marketing materials and in a property’s MLS listing.)

New homes won’t appeal to all buyers, but as builders rush to meet demand, they’re accounting for a bigger chunk of sales than usual. New home sales currently represent about 30 percent of the market, compared to 10 to 15 percent historically. Zonda operates a consumer-facing website, Livabl, where buyers interested in new homes can search what it claims is the largest, most accurate catalog of new construction homes.

“If you have consumers that are saying ‘I really want to avoid renovations,’ or ‘I want to customize my home’ or, ‘Geez, the monthly payment is what’s really hurting me’ — filtering them into the new home space might make a lot of sense,” Wolf said. “But then you look at other consumers that are really price or value focused and really don’t want that cookie cutter — they want something from the existing home side.”

According to Zonda research, 75 percent of builders plan to build more homes this year compared to last year, Wolf said — if demand holds up.

“What we’ve seen from the building community is if consumers are out [to buy], they want to build. If consumers pull back, they pull back,” Wolf said. “So right now because they’re seeing that early optimism, they’re saying ‘Yes, we want to build more homes.’ But that idea of demand holding up, I think a lot of people are predicating that on what happens with mortgage rates. And the prevailing belief is that mortgage rates will be tricky for a while.”

Zonda is forecasting that single-family home starts will grow by 2 percent this year, but that total starts will decline by 7 percent, driven by a 25 percent drop in multifamily construction.

“What I will caution is if you’re active in the Southeast, there are a record level of completions expected to be coming online over this year and into next year,” Wolf said. “So as consumers are saying, ‘Okay, what kind of options are out there?’ They may find more rental communities that are either dropping prices or offering concessions. I think that will be a little bit of a challenge in some parts of the market.”

Baby Boomers are in the catbird seat

So who are today’s buyers?

“Well, it’s those that have wealth — those that are not just buying off of their income,” Wolf said. “Because those buying off of their income are struggling with the affordability backdrop.”

From 2014 through 2022, Millennials were the most active players in housing markets. But strong home price appreciation and elevated mortgage rates have helped Baby Boomers reclaim that title.

“The millennials are the largest living generation, but Boomers are number one for overall wealth,” Wolf said, with many benefiting from recent strength in the stock market as well as rising home prices. Close to half of homeowners — 42 percent — have paid off their mortgage and own their home free and clear.

“I’m talking about people that bought homes 20 years ago, 30 years ago, maybe they’ve already paid off the mortgage but they’ve seen the value of the asset go up,” Wolf said. “So if you either don’t have a mortgage or have wealth tied to other parts of the economy, you’re not as sensitive to what is happening to interest rates.”

Regardless of your age, “life happens,” and people are buying today because they’re relocating, getting married, having children or retiring. While many homeowners feel locked into the low rate on their current mortgage, it’s not an impediment to all.

“There are times where it makes no sense to get rid of a three or 4 percent interest rate, but if your home no longer works we’ve seen people willing and able to do it,” Wolf said.

Email Matt Carter





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