Zillow: $1,000/Month Cash Flow Exists in These Markets

0:05Orphe Divounguy:Orphe, welcome back to On The Market. Thanks for joining us again. Thanks for having me. Well, I want to start with a report that your team put out because I liked, I'll just be honest, I liked the headline. It said, home shopping season shows signs of life as sales new listings rebound. So tell us a little bit about it. I like the sound of signs of life. Where are you seeing that in the market right now? Yeah, you know, I want to kind of like couch this a little bit. You know, we're seeing an increase in sales, but it's kind of normal, right? We're getting to that kind of peak of the home shopping season.

0:40So that's somewhat expected. I think the fact that mortgage rates are still below year ago levels is also providing support for activity right now. The typical monthly mortgage payment, if you were to come up with 20 % down, is down roughly 2.5 % on a year-over-year basis. So that's the positive. But it's really a fragile recovery, right? Because there are so many headwinds, right? We know inflation is back to above 4%. The labor market is still very uncertain. Higher rates and quits are really low. Quits are low because people don't feel confident enough to go and look for another job or jump ship to a better pay.

1:20And mortgage rates are volatile. So, you know, when you look at the Bureau of Economic Analysis, real disposable income shows basically had been falling this year. It's fallen for five of the last seven months. And so people are kind of are squeezed and the cost of everything has gone up. Now, it seems housing, you know, with the cost of housing kind of easing is good. You know, it's kind of the bright spot in today's economy, actually.

1:47Orphe Divounguy:Yeah, I see that. So I'm curious, though, with all the affordability challenges, where is this new demand coming from? Is it because prices are a little bit soft and so people are willing to get discounts and then jump back in? And I know it's tepid growth. We're not saying there's some big increase in sales, but even that little improvement is notable. So where is it coming from? You know, when we look at our days, depending the time it takes for a home to go under contract, it's really back to pre-pandemic levels, right? When you look at the share of homes that sell within a week, roughly one in five sell within a week.

2:29It's still pretty fast. It's back, basically back to the pre-pandemic level. We had gotten used to home selling really, really fast and things have kind of slowed back down to the pre-pandemic pace. And so the question I'm getting from a lot of people is, well, if things are just slowed back down to the pre-pandemic pace, why is it that total home sales are still so far below, roughly 20 percent below where they were before the pandemic? Right. And really, the answer to that is on the supply side. We have roughly 19 percent fewer homes for sale across the United States. And so the demand side, yes, affordability is a challenge, but affordability has been improving.

3:12So the demand side has actually been OK. Conditional on listing your home, you can still sell it in a week, right? One in five will sell in a week. you know, median days to pay is about 19 days last month. So still pretty normal. The supply side is what's been lacking. And so when I look across the country at markets that have seen a small and modest bounce in home sales, they're the markets where we've seen the biggest increase in inventory relative to the pre-pandemic pace. So I'm looking at Austin, I'm looking at Raleigh, North Carolina where, you know, my metro area, those are markets where the total number of homes to sale has now surpassed the pre-pandemic level.

3:56And there are also markets where we're seeing the increase in home sales. So really, very much all this to say, this is very much a supply story. In places where we've seen a big increase in supply, you've seen a bigger adjustment in prices that has helped improve affordability, you know, relatively more than in other places. And that's where you're seeing the modest increase in sales that we're seeing right now.

4:24Orphe Divounguy:And do you think that trend will extend to other markets? Because a lot of the ones you're talking about were maybe some of the pandemic boom towns, places that grew really quickly. And, you know, there's been a modest correction. Do you think there's a chance we see a more broad-based increase in new listings and inventory that might help the market gain a little bit more steam? Yeah. Unfortunately, you know, those markets, like you said, are the markets where you basically saw the big increase in new construction. A lot of new homes end up back on the market as existing homes. And so all homes are necessary.

5:02Unfortunately, of course, you know, the constraint is in markets that just don't build a lot of housing. It's in the Northeast. It's on the West Coast, right, where you just haven't seen a big increase in supply. And in the last year and a half or so, builders have already begun to pull back. Yep. And so that pullback, it basically means that it's not, we're not likely to see that big increase in sales in, you know, across the country. like we were hoping to see. And so you're looking at a housing market that's seeing a modest increase in home sales, but where the constraint very much lies on the inventory side, the supply side of the market.

5:46Orphe Divounguy:To me, it just feels like we're in the most boring housing market we've ever been in. It's not terrible. It's not great. It's just kind of flat. The listeners of the show will know I call it the great stall. We're just in this like stalled period. And I have a hard time imagining what breaks us out of this other than some like sort of big macroeconomic event that sort of like changes or shifts the balance between supply and demand, whether that's like a big increase in unemployment or a recession. What are the things that could move us out of that? So I won't make you make a prediction, but like, how do we get unstuck?

6:29You know, the current environment is not all bad, right? I agree. You know, I looked at listings, you know, my colleague Kara on the Zillow economic research team looked at listings on Zillow that would still be cash flow positive for investors, right? And so looking at for sale listings on Zillow, where the full carrying cost, principal interest, property tax, insurance, maintenance, compared to the rent you would get for the unit, our rentals estimate, would still generate some positive cash flow. And we also flagged listings that would clear roughly$1 ,000 or more per month. And when you do that, right, which I think is very interesting, right, in markets that are slower, there are more opportunities that arise.

7:16You're no longer really, you know, engaged in bidding wars with other buyers. And so there's an opportunity here. And so when we do that math, what we see is the highest share of listings that would be cash flow positive on Zillow are in markets like Buffalo, right? Those supply constraint markets, Buffalo, Detroit, Cleveland, St. Louis, Missouri, right? In Buffalo, roughly 10%, one in 10 listings could clear$1 ,000 a month in cash flow.

7:45Orphe Divounguy:$1 ,000 a month? $1 ,000 a month. So there are opportunities out there, right? What do these markets have come in? Well, the common thread is a low price to rent ratio, right? Cheaper prices relative to the rent that the property would command. And I think that's the whole game, right? And so, even though it's kind of this kind of slow and maybe boring housing market, it doesn't have to be that way for investors always out there looking for opportunities to take advantage of current conditions. I agree with you completely. I actually think right now is a better opportunity to buy than I've seen in a while because even though inventory is not rising, you see, like you said, days on market improving, the ability to negotiate, the leverage that you have, the concessions that sellers are offering.

8:38Orphe Divounguy:If you look at the combination of those variables and the lower competition, it's just easier to find things right now than it has been in years. So I'm with you on that. And I think the other thing about a boring market is when I say boring, I don't mean bad. I just think on a show where we talk about the housing market all day, there's not much changing. Not much has changed in the last couple of months. It's just stagnant. but I have two questions for you. First and foremost, how do I get my hands on that list of properties that you get a thousand bucks a month in cashflow? Because I think our audience would pay big money for it.

9:21I'm teasing it out. It's something we haven't published yet at Zillow, but we will make sure to let you know as soon as it's released.

9:30Orphe Divounguy:We want to see it. Again, it's zillow.com forward slash research. It's basically our research page where you could find all of our insights, everything we observe on the Zillow platform. I assume with your colleague, I know it's your colleague's research, but was that assuming a purchase price at asking? Yes, that's right. Exactly. You're assuming asking the listing as it is on Zillow right now. But to your point, this is very much negotiable right now. Yeah, you might be able to do better. Exactly, exactly. Exactly. You know what's interesting? Most real estate entrepreneurs have dozens of little problems they'd love software to solve.

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12:13Orphe Divounguy:So like if we're in this boring market though, like, do you see this continuing for the foreseeable future? Just not a lot of movement in either direction? Yeah, I think we probably are going to continue to see modest improvements in sales. I think price growth, you know, when we look at home value appreciation, it's pretty flat, you know, we have it at 1.1 % for the year forecasted. But when you consider the fact that builders have pulled back, we really start to see it with rentals. We expect completions, multifamily completions to drop roughly 17 % on a year over year to finish the year roughly 17 % down on a year over year basis.

12:55And so when the flow pulls back so much, it's unlikely that we're going to continue to see the vacancy rate rising. And we're already seeing that in our data, Rent growth has been firming for the past three consecutive months compared to last year, right? You know, taking the seasonality out of it. So to me, what that tells me is that the pullback in supply is likely going to start putting upward pressure on both rents and prices across the country. And so for people that were, you know, kind of like sitting there in these markets that they felt, you know, supplied like, you know, Nashville or something like that, where you couldn't really feel like you couldn't raise the rent.

13:38Well, I think those people are going to start to see, you know, with the vacancy rate basically plateauing that they'll be able to commend higher rents and that the amount of concessions they had to give up is likely going to start falling back. So whether we're going to see a lot of sales activity, you know, a big boost in sales activity, that remains a big question mark. But on the price front, I think the fact that builders have pulled back could mean that prices and rents will start to firm up again. Now, I'm a little bit optimistic because on the policy front, you're hearing that at all levels of government, people are more and more are talking about affordability.

14:19They're talking about unleashing unleashing builders to build more housing. They're talking about changing land use restrictions and building codes to allow builders to build more housing and to build denser. And so I am optimistic that if all of those things come to pass and you start to see a big policy shift to allow builders to build more housing across the country, we'll start to see more transaction activity. Right. Probably not in the near term, but but that's something to look forward to over the next few years.

14:52Orphe Divounguy:Well, I have a few questions about that. Let's start with the rent piece, because that was sort of my thesis going into the year, that if you look at the main variable that has been suppressing rent, it's all this multifamily supply that we've had from the last couple of years. And we know the great thing about multifamily is, you know, years ahead when it's coming. So it's easy. It's a relatively easy thing to forecast. And we know that we're sort of we've hit the peak in all the supply coming online. Now it's going to start declining. That should improve occupancy rates. And then we should see rent start to climb again.

15:31Orphe Divounguy:That sort of was my opinion. I'm wavering a little bit, though, because I guess my concern is if you look at just affordability throughout the economy, not housing only. Yeah. And you see people just being pretty constrained. The savings rate is going down. Consumer sentiment's extremely low. Default rates on credit cards are going up. All of these issues like is that going to weigh on household formation? could we see lower demand for housing because people are going to do what they do during hard times, which is continue to live with a roommate or move in with family or those kinds of things?

16:09Yeah, I think that's a good point. The answer to that is people tend to delay, right? They'll delay. They won't stay at home forever, right? And so, yes, exactly. We may see a bit of a delay, But that's very much tied to what the economy is doing. So if the labor market starts to heat up again, if inflation comes back in line, right, those problems start to disappear again. So I'm not too concerned about that part, you know, as much as I was as well. You know, those are things that you have to consider when you when you sit down and write down a forecast, right? Headwinds and tailwinds. And you've highlighted some of the headwinds in the near term.

16:49Orphe Divounguy:Yeah, I guess it is obviously very regional. If you're in a market that is going to go from supply glut to supply constraint, you'll probably see rent going up. If you're in a market that's just pretty unaffordable and still has a decent number of multifamily deliveries, have modest expectations for rent. The second thing I wanted to ask you about, which you mentioned earlier, was just kind of about the housing shortage. Because, you know, I've talked about this. We talk about it all the time. Anywhere between 1 to 7 million units short, you know, I think most estimates are 3 to 4 million. I don't know if you have one at Zillow.

17:25I'm at roughly 4.7 million. Mine is very transparent, in fact. I love talking about it because it's the one that makes the most sense. I'm comparing the number of families that are doubling up, low income families that are stuck sharing a unit to the number of homes that are actually available across the United States for rent or for sale.

17:47Orphe Divounguy:Wow. And so when you do that simple comparison, right, what you learn is the gap is roughly 4.7 million. If every one of those families, which I'm sure they would love to have a unit of their own, right, not share a house with people that are unrelated to them. If we were to put all those families out and say, hey, we'd love to give you a unit of your own, there wouldn't be enough to go around for everyone. Right. We'd be short 4.7 million units. Wow. And so very simple math, very, very transparent. I like that. You can replicate it by using the American Community Survey. And and you come up with this number and you can track it over time.

18:27And so we're actually going to update with the latest American Community Survey. We're going to update that number, and that should be coming out in the next week or two on the platform. Yeah.

18:38Orphe Divounguy:I'll definitely check that out. And just so everyone knows, the American Community Survey is part of the census. It's public data. You can go get for yourself if you want to check this out. Super interesting. Well, I like your definition too. That makes a lot of sense to me. My question is, is this supply shortage a moment in time? Because you have a real supply shortage. I believe that. We also have a demographic trend that suggests that boomers are aging. At the same time, we have lower birth rates. We have very low immigration rates right now. And current projections are that our population is going to peak sometime in like the 2050s, right?

19:21Orphe Divounguy:Like give or take, look at different projections. So is there a chance that even if we do almost nothing and just like keep construction rates at the pace that they're at, Could in 10 years, this supply shortage just be equilibrium or potentially even a supply glut? It's a very difficult question to answer because remember, a decline in population or even just a slowdown in population growth also assumes fewer potential construction workers and fewer plumbers and electricians. And so you're going to likely get a stronger decline in the supply of housing. Like existing supply will deteriorate faster?

20:03Existing supply definitely deteriorates over time. And so that's one of the problems I think to consider. The other one is, and we've looked at this at Zillow as well, is a lot of young people like to move to areas with vibrant labor markets, right? Where the jobs are. So they're moving to the coasts, right? They're moving to New York and Miami and Seattle and San Francisco. And what you learn when you look at the demographic profile of this country is that a lot of the homes owned by older Americans on these big lots that we could potentially build on are in the Midwest. They're far away from those big job centers that people are moving to.

20:55And so there's a bit of a spatial

20:58Orphe Divounguy:mismatch here that needs to be resolved as well. And so I'm not necessarily optimistic that just shrinking the population is going to result in fixing the mismatches that we have currently. Right. And actually, I was looking into this myself and I was looking at Japan because it's a country with declining population. I was curious what happened there. And what it shows is similar to what you described, which is that in rural areas, home prices did go down, but there was a lot of basically abandoned homes or vacant homes. But metro areas were essentially unaffected because everyone still want to live in the areas with economic opportunity.

21:47Orphe Divounguy:People just moved to that. So, yeah, that does seem like the most likely scenario. But it's just something as an investor and a housing analyst, it's hard to wrap your head around how that could play out because these are two sort of big trends kind of going to collide with each other probably in the next 10 years or so. So great to get your take on that. If I had to hire someone to join the BiggerPockets team, I wouldn't just be looking for someone who checks a few boxes on a resume. I'd want someone who understands real estate, can move fast, communicates well, and can jump into a fast-paced environment without missing a beat.

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24:16Orphe Divounguy:So Orfe, what else are you working on? I mean, you got, you're telling us all this cool stuff. You're updating us on the housing shortage. You're updating us on rental opportunities. What else interesting is going on at Zillow that we should know about? Yeah, I mean, again, the website is zillow.com forward slash research. A lot of people just go to zillow.com to look at housing, but the research lives on the research page. And we're constantly putting out content. I think one of the pieces that I'm going to share soon is on pricing, right? The fact that it's really important to price your home right as a seller.