Dave:
It is officially prediction season, and today’s guest is someone who never takes his eyes off the data. Mike Simonsen 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 it, 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 puts some great logic and thinking behind it, and I think it’s gonna 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 gonna 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.

Speaker 3:
Mm-Hmm,

Mike:
. Um, there were a lot of folks in the beginning of 24 that thought mortgage rates would be in the fives during the year. And, you know, we were in the upper sixes and 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, you know, almost three years into the dramatic slowdown in the market. So that was a, that was a surprise, you know, and there were impacts of, uh, you know, other, 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, you know, we in a world where mortgage rates are higher, where supply is higher, where demand is lower, and yet home prices didn’t decline. . Yeah. So home prices stayed higher as well. And so I’d say that was a surprise

Dave:
For sure. Yeah. I, I, uh, I was a bit surprised by the strength of appreciation. I actually, you know, I’m wrong all the time. I’m not trying to brag. I actually didn’t think mortgage rates were gonna come back down, but I did think that that would cause more of a moderation in home price appreciation than we saw. Like as of last readings, you know, we’re still up 4% year over year. That’s higher than the long-term average. So there, there are a lot of surprises here. So maybe we can just break these down one by one, Mike. Uh, you know, you talked a bit about inventory, which has been on all of our minds for the last, God, five years now.

Mike:
Yeah.

Dave:
But tell us, you know, you said that inventory went up faster than you’re expected. Can you give us some context? Like where does inventory sit right now? How does that compare to historical context? What’s the trend?

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

Dave:
Okay.

Mike:
Um, 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, you know, rates were stubbornly high and there was, there was never a moment of reprieve until middle of September. Mortgage rates came down, back down close to 6%, a little head fake of, of demand, a little window. So, so inventory wise, um, you know, we’re looking at, you know, 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 than the Sunbelt states.

Speaker 3:
Mm-Hmm.

Mike:
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 like Illinois or or Ohio have just barely more homes unsold than during the pandemic.

Speaker 3:
Mm-Hmm. ,

Mike:
Where Austin, Texas is like at a 15 year high. And what, what happened is, so we have this bifurcated market, right? 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 that’s happened is a migration pattern. So, you know, 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. Mm-Hmm. . And so that migration pattern is on hold. And so we’re not selling our house in Chicago and buying it in Dallas. And 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. So 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, you know, 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. You know, 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. You know, when we look at, uh, really low transaction volume and we look at the market, we say, wow, demand’s really low. You know, we talked about like expecting home prices to fall because there’s demand is weaker. The observation is that in a world where in a supply demand equation, demand falls, but supply is pretty, that the new seller supply remains restricted then than that like 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.

Speaker 3:
Yeah.

Mike:
That’s really when we create that imbalance. And so we watch for that every, every week in the Altos data, you know, we’re tracking the new listings. And so the new listings volume is, you know, about seven, 8% more than last year at this time. Mm-Hmm. . So it’s growing a little bit, you know, each week it’s, there are 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, the previous decade by maybe, you know, tens of thousands of people every week fewer sell their homes now. Great. Thank you for clarifying that.

Dave:
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? Mike weighs in after the break. Hey friends, I’m here with Mike Simonsen of Altos Research and we were 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. ’cause you said specifically that migration pattern is on hold. And we did see, of course, the pandemic, a lot of people moving from the west or the Northeast or the Midwest to the southeast, um, or to the, you know, to the Sunbelt basically, uh, saw the biggest in migration. You said it’s on pause. Does that mean you think that this is temporary and that, uh, 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 you know, 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. Hmm. And we can see it in housing, we can see it in the migration patterns. We can see it in the, you know, the inventory where we’re not selling in Chicago and buying in Texas or, you know, selling in, in the Midwest and buying in Denver. Those have slowed down. And if you study the, the migration, the folks who study migration specifically actually point out that places like Austin had negative like outbound migration in the last year.

Speaker 3:
Hmm.

Mike:
And, uh, 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, you know, employees, I, 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.
So I think that that slowly transitions out. And I think it, you know, 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. And so now if they’re hiring like, oh, you know, they, they are hiring Austin, so I will, you know, quit my job in Chicago and, 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 like 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:
Okay. That makes sense. So I’m just trying to follow this ’cause I, I’m not saying I disagree with the presumption that migration will accelerate again, but the way I keep thinking about it is like there was always migration, pre pandemic, and it wasn’t that dramatic. You know, people moved all the time and yeah, the southeast was growing, but in some ways I feel like okay, maybe even when affordability gets back of 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 like super rapid migration that we saw during the pandemic, that level of activity will resume?

Mike:
Yeah, I think the pandemic was a, you know, a unique phenomenon. Right, okay. It was ultra cheap money and no offices and like, like it was at a, 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, like, you know, it’s pretty nice to move, you know, if you live in Chicago in February, it’s pretty nice to live move to Phoenix, right? Like there’s there’s a lot of appeal to that. Yeah. And when you don’t have to worry about getting a job in Phoenix, then, then you move

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

Mike:
You know, I could see the impact happening in, in housing, which I watch, but then I would also talk, I would watch labor economists talk about the similar thing happening in the jobs market. And I thought, wow, that’s the same phenomenon.

Dave:
Hmm.

Mike:
Right. Yeah. And that’s why I called it the great stake,

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

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

Dave:
No, I don’t like to.

Mike:
Yeah, I mean, like, I’ve been wrong on mortgage rates for 30 years, but we can look at things and, and there, there are things that dial in to, uh, what we know about mortgage rates for the coming year. And in fact, at, at HousingWire, we just published at 2025 comprehensive housing market forecast. So we put these assumptions about mortgage rates in there, you know, 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, uh, the economy has stayed hotter. The signals on, like the employment market, like I said, has stayed lower than expected. Now we have Trump coming in and, um, the market is viewing the Trump policies as inflationary. Like, so all of these things are conspiring to keep interest rates higher.

Speaker 3:
Mm-hmm.

Mike:
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, we, you know, imagine a world where economy slows a little bit, we have a little bit more, uh, 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, pretty stand, like what most, most watchers are predicting.

Mike:
Yeah. And then, 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 like a major recession hit or some kind of real crisis hit that abruptly slows the, the economy. And, you know, you can’t predict those. Uh, but, but assuming that doesn’t happen, you know, we have slowing economy not accelerating from here, which would push rates higher. We’d have, you know, we have slowing economy, gently slowing economy that would ease those back down and keep rates in the sixes. So, you know, we can see, you know, in our housing wire forecast, like I could imagine, uh, uh, moments in 2025 where rates dip under 6%.

Speaker 3:
Yeah.

Mike:
You know, we got close to that this year and maybe, you know, you get a, uh, a handful of those weeks where it dips under 6%, but mostly stays, you know, 6.75, 6.5, 6.75 if rates stay close to seven for the year or above seven, you know, we’re gonna revise things down. We’re gonna assume fewer purchases. We’re gonna say inventory builds, like all of our forecasts get revised down if rates, you know, 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 gonna be next year, a year is a really long time , you know, like you see in this past year’s data, we’ve had rates close to eight, we’ve had rates close to six, you know, like there’s big swings there. So I appreciate you saying that there’s probably gonna be volatility. I, I keep cautioning people that even if rates are on a general downward trajectory, uh, which is the consensus view, that it’s gonna be a rocky road down, you know, like things are gonna go up, they’re gonna go down. I would personally expect a lot of volatility in the next year. But Mike, I, you know, given what you just said that you think rates will, you know, 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 gonna stay out of the market?

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

Dave:
Right.

Mike:
Like those scenarios could happen, although I don’t expect them to happen.

Dave:
Thank you for clarifying that. And, uh, you’re beating me to some of my questions about 2025, but, uh, 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, I read a survey on Redfin that said 25% of prospective home buyers waiting until after the election. I think there was a, some data that supported that Mike are 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. Like 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. You know, 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 an, in fact, as big an uptick as I expected.

Speaker 3:
Mm-Hmm.

Mike:
Post-election. And when you think about those folks in that survey who said, I’m waiting till after the election, a lot of folks were, were thinking, he was talking to a friend this weekend who said, you know, I, 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, you know, a year ago at, and he, you 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, like rates are even higher. So, you know, he’s still waiting, right? And so he’s, he waited till after the election and now he’s gotta wait till next spring. And you know, like maybe, maybe there’s another turnaround, uh, you know, a dip in rates before he can refinance again. Um, so I expect that there’s that kind of thing happening

Dave:
Where people just thought basically after the election, you know, one way or another rates were gonna go down,

Mike:
Maybe they go down. Yeah. Yeah. And you know, like I said, it is really hard to forecast mortgage rates, so, you know, like Right. You know, who, who knows what is actually gonna 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, I agree. I think even though people might be more enthusiastic or more, you know, 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 is that rates have just really gone up a lot in the last two months in September, you know, 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.

Dave:
Yeah.

Mike:
We didn’t see it when rates were at six and a half. You know, 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, you know, and then now we’re back up towards seven. So when we look at, you know, 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 and vary. It’d be slightly, it’d be bullish for, you know, let’s see, more transactions you’d see, you know, 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, you know, 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, like 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 gonna grow home sales? Are they this number of transactions finally gonna grow now, you know, for, for the consumer, consumers care about home prices, are my prices gonna go up or prices gonna go down? But for the economy and for the industry, like the number of transactions really matters.

Speaker 3:
Absolutely.

Mike:
And it’s the number of transactions that got pummeled this cycle post pandemic. And so, you know, 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 years. Like, that’s dramatically fewer.

Dave:
Yeah. Yeah. I, I keep telling people that like, you know, I think a lot of people who aren’t in the industry, like you said, just look at prices, but you know, 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, you know, for investors and people who watch this market, the shift has been really dramatic because a normal year, even before the pandemic right, 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, way fewer deals to and transactions for perhaps a, a bigger amount of people relying on those transactions for their livelihood.

Mike:
That’s exactly right. And so when we look at 2025, you know, the question is, are we finally gonna grow home sales? And if so, by how much the question on prices is less compelling right now, because as we can see, you know, even though the transaction volume fell by a third in the last couple 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. So two at two full years, 23 and 24 at about 4 million a pace of 4 million home sales. So then, then the question is, will it finally grow next year? And if so, by how much? And 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.
So a little bit of growth, not a ton of growth, but also not staying, you know, like, like we’re gonna get some growth finally. Um, and the reason it, 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. Uh, but it takes more years to ramp up that demand again. So, so there are very few years where it home sales grow by 10% or more. So if you see folks like, I think NAR maybe had a, uh, said 4.9 million home sales for next year, and I just can’t figure out how, how the market could grow by 25% or 20% in, uh, in one year without some kind of like crazy government program, you know? But we can see 5% growth and that, and that’s, um, that implies some stability in mortgage rates. So we’re assuming that mortgage rates stay in the sixes.

Speaker 3:
Yeah.

Mike:
So we’re looking at, you know, slight growth, 5% growth, 200,000 more sales, uh, in the year, and then, you know, you do that again the next year and then, you know, 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 know, you just alluded to, you’ll say prices. So what do you think will happen for prices?

Mike:
So, uh, 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 with outright home price declines nationally, um, unless we get into some wacky, you know, like real extreme things with, with mortgage rates, transaction volumes fall back way down, like that could drive supply up, demand down and that could drive home prices down. But we think the, 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 outta here, is there anything else from all the research you do that you think our audience should know heading into next year?

Mike:
Um, I think the real interesting one to watch is that new listings volume each week, because a couple things need to happen. Like we wanna see if we’re gonna 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, the phenomenon is distressed sellers. And, and suddenly we go from say 60 or 70,000 new listings for single family homes. Uh, uh, each week we go to 70, 80, 90,000. And so 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, could go down, like, you know, even crash next year. So the, the cool one to watch is that new listings volume each week. ’cause 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 wanna file Mike and his research, we will 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.