Why homebuyers won’t get a break in 2023

Zillow Chief Economist Skylar Olsen gazes at her MacBook the way a soothsayer peers into a crystal ball. The picture is murky.

Despite falling prices, homes are more unaffordable than ever. Mortgage rates are fluctuating but look to rise. Demand is down, but so are listings.

Tea leaves are easier to read.

“It’s a great pause,” Olsen says of the current housing market. “Holding one’s breath. Suspended animation.”

Olsen joined the online real estate firm’s research team in 2012, returning last summer as chief economist after a two-year break working as a consultant and at a startup.

We spoke with Olsen during a recent visit to Zillow’s Southern California office in Irvine. We asked her about the current housing slowdown and prospects for priced-out home shoppers to get a crack at homeownership this year.

Skylar Olsen is the Chief Economist at Zillow talks about the housing market at the company’s offices in Irvine, CA on Thursday, March 9, 2023. (Photo by Paul Bersebach, Orange County Register/SCNG)

Here are highlights of that conversation, edited for length and clarity.

Q: What’s happening with the market?

A: It’s holding a breath. Expect mortgage rates to bounce between 6% and 7% at least for the next quarter and early home shopping season. If interest rates drift back down to 6%, you will see more people ready to move forward.

Buyers do have more bargaining power right now. So, buyers are probably asking (sellers) for mortgage rate buy-downs and other concessions to handle the monthly affordability challenge as opposed to, say, dropping that price.

High mortgage rates are a challenge, and without inventory coming to the market, prices are not really able to come down fast enough to resolve that challenge.

Q: The market frenzy of the past two years pushed a lot of home shoppers to the sidelines. Will 2023 be more accommodating to buyers?

A: It will not. I don’t think I can promise future first-time buyers a dramatic improvement in affordability over the next couple of years.

Things don’t get better than 2022 … (until) December, if not early 2024. So, I think we’re holding our breath over this (spring’s) home shopping season.

Inventory numbers went down again. In Los Angeles, homes available at any time throughout February were 40% lower than pre-pandemic. San Jose looked a little better (with inventory) down 28%. And so, inventory has really been unable to return, and that keeps some competitive pressure on.

You know, numbers kind of vary, but I’m pretty sure this would have been the record number of 25- to 45-year-olds in terms of population this year. And they’re facing a housing market that’s so unaffordable, and we’re just not processing sales.

They’d probably like to get married, have kids and progress, as we all do. But in terms of that milestone, buying a house (and) settling down, I can’t imagine a harder market.

Buying a home remains elusive for many. In Los Angeles, it would take nearly 20 years for a buyer to save up a 10% down payment, using 5% of the local median household income per year, according to Zillow’s chief economist. (iStockphoto)

Q: Will priced-out home shoppers still be moving from California to Las Vegas, Phoenix or Dallas? Or continue renting?

A: You might want to consider that if your future is to be a homeowner. You might have to actually explore further out or different areas. And I know that’s hard. But that’s a reality for many households.

To save up a 10% down payment, using 5% of the local median household income per year, you’re looking at two decades — like 19 ½ years — in Los Angeles. That’s crazy.

It’s 17 years in San Francisco, and 18.8 years in San Jose, based on local incomes.

You probably have to get a gift from family or friends to make it happen. Or you need to inherit a home to be a homeowner in California. This is prohibitive.

And notice how low the numbers can get if you look elsewhere. In Dallas, 8.7 years. Phoenix, 11 years. Las Vegas, 11.7 years.

Q: What about inland parts of California?

A: In Riverside (and San Bernardino counties), it’s 13.9 years. In Sacramento, it’s 12.6 years.

Q: What advice do you have for home shoppers who have been waiting for the frenzy to die down?

A: Make sure you’re working with a quality local expert, first and foremost, because low inventory means it’s actually hard.

But I think more relevant at a time like this is the mortgage rate. That’s really a challenge, right?

People spend more time shopping for their appliances, according to our massive consumer survey, than they do shopping for a mortgage rate. And yet, that mortgage rate can be so impactful.

So, make sure you’re forming relationships with multiple lenders as you start to explore what’s actually possible.

Then, there are programs to avoid high rates. You could do a 2-1 (mortgage rate) buy-down, where that first year, your rate is 2 percentage points lower, and then 1 percentage point lower (in year two), and then you’re back at whatever you locked to.

There also are 3-2-1 buy-downs (starting at 3 percentage points lower the first year). These programs are fairly popular right now. These are usually within the context of seller concessions, where a seller will buy down your rate for you.

That kind of strategy is only good if you know you’re going to be leaving after (three or) four years or if you anticipate mortgage rates coming back down.

Q: Are we facing a recession?

A: If you talked to me last month, I was pretty optimistic. Now, I do feel more pessimistic and more worried about a recession to come. I think it will be painful for job loss, but I think ultimately we need inflation to come down.

Q: With home sales down, you’d think there would be more demand for rentals. But vacancies are up and rent growth is down. How come?

A: Rents slowed down from an incredibly aggressive pace. It had to slow down because the previous pace was unsustainable.

Some of it was making up for lost revenues during the pandemic. Rental markets were just frozen with eviction moratoriums and everything else. So, some of the second-year rent growth was about reopening. The rental market (was) becoming unfrozen and catching up for lost revenues.

I’m not surprised that rent slowed down from what it was. That was kind of wild. We hit a year-over-year rent growth of 16.3% in Los Angeles in May 2022 and 11.5% in San Francisco in February 2022.

(By comparison, rent growth is now 3.6% in L.A. and 8.3% in San Francisco, according to Zillow.)

Q: What’s the solution to California’s insanely high housing costs?

A: It really will come down to adding more homes. You can see that this is not easy, and it’s very contentious, even though we know that this is the long-run solution.

The way that I think about it is when we support someone on the demand side with downpayment assistance or housing vouchers or any of these things, we are handling the emergency side of it. We are not fixing the problem.

Supply-side solutions are the only way to actually fix the problem.


Job: Chief economist

Company: Zillow

Experience: Researcher and principal economist at Zillow from 2012-20, leaving to found the consultancy firm Reimagine Economics and to serve as head of economics at Tomo, a digital mortgage startup. She returned to Zillow in July 2022.

Age: 37

Residence: Bainbridge Island

Family: Married with two children.

Education: Bachelor’s in economics from Cal Poly San Luis Obispo, doctorate in environmental economics from the University of Washington

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