Weaker Home Prices Ahead | Zillow Downgrades 2025 Home Price Forecast

Dave:
Zillow just released their February housing market report, and they are now predicting much weaker home value growth and only slight increases in existing home sales for 2025. So is the market already cooling off or just maybe leveling out a bit? Today I’m joined by Zillow’s senior economist, ORFE dga, who will walk us through these new projections. We’ll talk about everything from inventory shifts to mortgage rates and what it all means for buyers, sellers, renters, investors, everyone. I’m Dave Meyer. Welcome to On the Market. Let’s jump right in. Orfe, welcome back to the show. Thanks for being here.

Orphe:
Thanks for having me. It’s so good to be back.

Dave:
Yeah, it’s always an exciting time. I mean, we always love talking to you, but one of the great things about your work at Zillow is you guys are always updating your forecasts, all of your data and sharing it with the public. So maybe I could just ask you to start there. Tell us a little bit about your most recent research and read on the housing market at the highest level.

Orphe:
Yeah, totally. I mean, we’re seeing more sellers return than we’re seeing on the buyer side, at least right yet, but I think that’s kind of typical. The housing market tends to slow down in the winter and then home buying activity really heats up in the warmer months when you get to the spring and you don’t have all the snow out there. We did have a big surprise though at the end of the year where we had two or three consecutive months of upside surprises, both in terms of existing home sales but also new home sales. And so I think that was really positive. In fact, we just had a new home sales report this morning from the Census Bureau that showed that even though new home sales declined in January, we had upward revisions to those big surprising numbers that we got at the end of 2024.
So even though you had a low home sale year, total home sales at a 30 year low in 2024, we ended the year strong. And I think that’s probably going to show up again as we head into the home shopping season. And so our forecast for now in terms of home values revised down down because if you have more supply, more listings on the market and slightly less demand, you get less pressure on home values. But we expect our home sales forecast to be just slightly above last year’s, 30 year, no. So we think 4.1 million, 4.1 million home sales compared to 4.09, so roughly flat. And I think, honestly, I think our forecast is somewhat pessimistic because I’m seeing things right now that give me some enthusiasm or excitement about this year’s home shopping season compared to last year.

Dave:
Okay. Well there’s a lot to dig in there, but that was a juicy nugget you left me with. So I want to hear about what your optimism is about, and just for some context, everyone, home sales, the total volume are down sharply from what would be considered normal. I don’t know. Or I think normal is like five, five and a half million. Sort of like where we were at pre pandemic, it’s shot up to six and a half million, but now we’re down, we had readings below 4 million. And so 4 million still sounds like a lot, but that is 25, 30% below what’s normal, 50% down from where we were during the pandemic. So it’s felt most people, it sounds like Orfe and your team at Zillow agree have been sort of projecting really modest improvements next year. So going from maybe like 4 million to 4.1 million. But it sounds like you have other reasons for optimism. Can you share those with us?

Orphe:
Oh, absolutely. Look, mortgage rates peaked on January 10th and have been declining since we’re at a four month low in terms of mortgage rates, according to mortgage use daily, they decline I think 44 basis points in the last month or so, a little over a month. Now, at the same time, you have higher number of total homes for sale on the market up inventory total inventory is up 18% when compared to last year. According to Zillow, data sellers are coming back and historically an increase in the number of sellers has usually been matched with an increase in number of buyers. Usually because mortgage rates decline, both sellers and buyers come back in the housing market. And when you have more buying supply, more supply and you have more buying demand, you end up with more sales. And so I think we should see a small rebound in home sales compared to a year ago. Of course, that’s absent any major shocks to the US economy.

Dave:
Yeah, of course. Yeah, there’s always that caveat. But yeah, no one knows if there’s going to be some black swan event, geopolitical turmoil, who knows what’s going to go on. But I think that’s a very strong sort of base case for what’s happening. I think you said what you’re expecting it to 4.1 is that the Zillow’s sort of official forecast right

Orphe:
Now? Yeah, the official forecast is 4.1 million home sales in 2025. But again, I find that somewhat pessimistic.

Dave:
And what do you attribute the upside too? I appreciate any forecast that’s conservative personally. I like that type of approach to forecasting. But if things were to even get better than 4.1, is it just dependent on rates? You think

Orphe:
Rates have a lot to do with it. It’s also the fact that people move for more than just the mortgage rates. Life happens, people will come back in the housing market and want to sell their homes. I think we were supply constrained for a long time, both in terms of existing homes, but also just in general. We just don’t build enough housing in this country. Over the course of the pandemic, we saw new construction, new starts, surpassed a million starts, mark, which was I think the first time since 2007, since before the global financial crisis that we had that many homes started, single family homes started in this country. So I mean that’s all good news. Builders pulled back a little bit but remain above that threshold. We saw that last year in 2024. I think that’s good news. You have more supply coming into the housing market at a time where we were basically constrained, start for housing for a long time at a time where you have a lot of families waiting in the wings, maybe even doubling up, living with people that are not related to them.
And that provides the opportunity to move out on your own, whether it’s for renting a new unit. We saw apartment construction increase tremendously during the pandemic. We see these vacancy rates rising and rent growth easing, allowing renters potentially to move out on their own. And then we see this big increase in single family home construction builders leaning into higher density. So you’re seeing town homes, condos being built again on a more slightly more affordable side, trying to make the math work for buyers. All of that should result in more transactions. I think more people moving in 2025.

Dave:
Well, I hope you’re right, and I know it’s not returning back to normal, but for things to get back to normal, you got to hit a bottom. Exactly. I’ve said for this year that I think fingers crossed in terms of transaction volume, I personally believe we’ve hit a bottom and it might not be a quick recovery, but I think we got to take what we can get at this point. And I think modest improvements in transaction volume is a positive thing for the entire industry. And so I agree with your take orfe and hope also that you are correct on this one. What do you see in terms of home values? That’s sort of the other part of the housing market health equation. We got to look at transaction volume, but we got to look at values too. Tell us what you and Zillow as a whole are forecasting this year.

Orphe:
I think we’ve revised our forecast down as well because essentially we saw more listings, more homes coming on the market than we saw sales. So if you have more homes and inventory starts to accumulate, that puts downward pressure on home values. And so our forecast was revised down from 2.9% to just 0.9% over 2025. So flat. And I think again, it’s good news because it means incomes have the ability to catch up. You have strong productivity growth, you have strong wage growth still. And what that means is if affordability will improve in 2025. So that’s good news. And of course you get a big surprise in terms of mortgage rates declining or moderating. Again, I got to say, I don’t expect them to drop a whole lot, but you get that surprise easing on the mortgage rate front. And again, affordability improves. You have more homes for sale and you should see more activity in the housing market.

Dave:
Got it. Yeah. Okay. Well, I have some questions, but first point of clarification. When you’re talking about 2.9 to 9% drop in your price forecast, is that nominal or real inflation adjusted prices? Are you talking about

Orphe:
Nominal? Okay, nominal.

Dave:
Yeah. Okay. This is sort of in line with what I’ve sort of been thinking, and I don’t forecast officially. I just do my own meta analysis of all other people’s thinking. And I sort of agree in theory that we’re going to see very modest, relatively flat nominal growth. And for everyone listening, nominal just means not inflation adjusted. So if you look at the literal price of a home, you’re going to see it going up. There is another way to look at this, which is inflation adjusted. And I’ve been saying, and I think this is true based on what Orfe is saying too, is in some markets, inflation adjusted prices are probably going to go down this
Because if it’s only going up 1% nationally and inflation, let’s call it 3% this year, that means in true spending power terms, prices are actually going down. So I just want to make that point clear. We’ve got more insights into how these trends may shape 2025. But first, a quick break. Stay with us. Welcome back to On the Market. I’m Dave Meyer here with Orfe dga. Let’s continue exploring Zillow’s most recent forecast. You said that it’s a good thing that prices are going to remain flat. I agree, and I’ll share my opinion why, but can you just tell me why you think that’s a good thing for the housing market? A lot of people might be surprised by that comment.

Orphe:
We’ve had a massive runup in home values during the pandemic and just kind of slowing down that pace I think would be good news for those who have been waiting for the opportunity to buy. And so from an affordability perspective, this could be good news for those who are waiting in the wings.

Dave:
I totally agree, and as we talk about on the show quite a lot, so much of the housing market, so much of everyone’s investing feces these days, it’s just all about affordability so much no matter what you’re talking about, it just boils down to affordability at the end of the day. And there were really three components of that. Mortgage rates, which I agree with you, I don’t think they’re going to go down too much, maybe a little bit. There is wage growth, which is going up and seems to be humming along pretty well. And then the big other factor is home prices. And so you create the scenario that even if mortgage rates don’t go down that much, if prices stay relatively flat and wages keep going, that restores some semblance of affordability. And I actually think there were some reports recently that in 2024, for the first time in several years, home affordability didn’t get worse. It didn’t get better, but it didn’t get worse. And again, I feel like that’s the theme, right? If it has to bottom out at some point and a bottom is good, even if it’s not a V-shaped recovery, starting to see that is good. And I think a restoration of affordability without a dramatic crash is almost the best thing that we could hope for right now. At least that’s my take on it.

Orphe:
Absolutely. It’s your soft landing.

Dave:
Yeah. Yeah. It’s the housing soft landing, basically. Right. So tell us a little bit about any regional differences that you’re expecting because during the pandemic, we saw fastest price growth, a lot of it in the Sunbelt Southeast concentrations. It seems like the pendulum swung back almost in the opposite direction now where the Northeast and the Midwest are hot and markets along the Gulf Coast are some of the areas seeing modest corrections, do you expect that pattern to continue or anything to change in sort of regional trends in the coming year?

Orphe:
So it is interesting. So what do we see right now? We see parts of the Midwest and the Northeast, relatively more affordable markets compared to nearby major job centers, still seeing really rapid price growth and rent growth. Again, it’s people go where it’s affordable and people transact where it’s affordable. You have more residential mobility in markets that are relatively more affordable. And historically it’s been affordability and inventory right now, part of the story in those relatively more affordable markets is they don’t have a ton of, they don’t build fast enough usually to keep up with demand. So northeast, Midwest not known for building a ton of housing, and now you’re seeing Florida, Texas, some of these markets that really built a lot of housing, you’re really seeing affordability improve there much faster
Than in other markets. And those are also markets where you still have pretty strong labor markets. So I always tell people, you really want to know what’s going to happen. Look at the labor market. If you look at the US census, the US census says the number one reason people move is jobs, the current population survey. And so I think that when you look at mobility in the labor market, it’s usually a good hint for mobility in the housing market. And so if you have a labor market that’s still pretty vibrant and where people are still moving from job to job or getting raises, it usually tells you a thing or two about residential mobility. And so I think it’s really going to depend on the industries that will really benefit from the decline in interest rates that we’re all expecting now from the Fed.
Remember, the markets that slowed down the most were expensive markets on the west coast, tech heavy finance, heavy markets. And then as soon as the Fed hinted at interest rate cuts and the stock market started doing really, really well and was labor markets started recovering, you start to see activity in those expensive markets again. So I wouldn’t be surprised if going into next year you start to see these strong labor markets, these big large job centers that are kind of heavy on tech and finance to see somewhat of a rebound in activity, especially if you factor in the fact that some employers are asking people to return to the

Dave:
Office. And for our audience, we tend to have sort of a nerdy do it yourself audience. Are there any particular reports or ways that you track that kind of data that you think our audience could do for themselves?

Orphe:
Yeah. Every time you have a labor market employment situation, A BLS employment situation, don’t just stick to the headline numbers, dig deep into the report, go to the local level. The local level kind of lags. The MSA level will lag maybe by one month or so. But dig into that, I look at employment growth, I look at wage growth, I look at labor force participation. The Jolts also is available at the local level. I think very few people actually know this, they stick to the Jolts is the job openings and labor turnover survey. People look at the headline for the us, go dig into the market and look at labor turnover, look at quit rates and job openings. I think those are important. We went from the great resignation to the Great stay and as we went from the great resignation to the great stay, you also saw a big drop in residential mobility across the country.
So pay attention to the labor market. I think that’s important. People look at their budget and they see, okay, if I expect to get a raise next year, I go out and buy a new car or I go out and decide to move. If I don’t think I have a lot of prospects out there, then that might actually hold me back a little bit, which also brings me to this topic of policy uncertainty. You probably saw it in the news recently. The more uncertainty is out there, the more people sit back, wait for the uncertainty to get resolved. And so I always say when policy uncertainty escalates, people tend to sit back and basically sit on their wallets. And so pay attention to the news headlines because that will be kind of telling of what’s going to happen both in the labor market but also the housing market.

Dave:
Got it. All right. That’s super good advice for everyone. So just as a recap, looking at the data, it’s all publicly available, everything that or I just said, if you want to look at Jolts data, if you want to look at BLS data, just Google your city and then BLS economic data and you’ll get so much information for free. So you could definitely check out all of this stuff pretty much for yourself.

Orphe:
Let me add one more thing, please. Because every time I give talks about the housing market, people pay attention to Zillow. They’re on Zillow all the time, but so few people go to zillow.com/research. If you go to zillow.com/research, you’ll find all of the Zillow data available at the local level. We’ve made some great dashboards as well, but my favorite toy is the Zillow Market Heat Index because with the Market Heat Index, it’s basically a measure of housing market tightness. So you look at how competitive market is demand relative to supply. And so I use that a lot when investors say, okay, well where’s a good place? I say, Hey, pay attention to tightness in the housing market. And so check out the Zillow market heat index.

Dave:
Totally. That’s a good one. And I think this for investors, I think it’s a really important one because there’s no right answer, at least in my opinion. I’m curious what you think orfe, that there’s no right answer about should you invest in a hot market or a cooler market. It depends on your strategy.
Knowing that information is going to be really helpful to you because if you know super hot market, you’re probably going to get some price growth hopefully for you if you’re buying in that market. But it’s going to be competitive. You’re going to have to bid aggressively. You’re going to have to do a quick close. If you’re in a market that’s cooler, you might not have as much appreciation in the short term, but you might be able to negotiate a longer close rate. That kind of information just really informs on a tactical level the stuff that you can and should be doing with your own investing decisions. Coming up, we’ll dig more into what Zillow’s latest February report means for both investors and renters. Don’t go anywhere.
All right, let’s jump right back in with Orfe dung guy and where Zillow sees the housing market may be heading this coming year. So you hinted a little bit about the rental market. We’ve been in this sort of slow rent growth overall. Another reason to not look at just the headlines because you look at overall rent growth and it sort of disguises, I think the reality, which is that single family rents have been growing pretty well, multifamily, depending on who you ask flat up a little bit. What is your outlook for rents in the coming year?

Orphe:
Yeah, I think we continue to see rent easing for now, but the big decline in starts, multifamily starts,

Dave:
That’s construction just for everyone to, sorry, yeah, new construction, basically

Orphe:
New construction. We saw this massive increase in new construction during the pandemic, and then a lot of apartment deliveries. And we think that they have peaked already. And so if you have fewer new projects being started by the end of the year or next year, you may end up having fewer deliveries coming on the market. And if you have fewer deliveries, then potentially you see a rebound in competition amongst renters or rebound in rent growth for multi-family units.

Dave:
Yeah. Okay. I’m curious if rents do start to sort of pick up again, do you think the dynamic will change, sort of been in this unusual period where it’s been a lot cheaper for people to rent than to buy in a lot of different markets and there’s no black and white answer for that. It’s a lot of personal preference, personal choice there, how long you’re going to stay. There’s so many variables there, but do you think there’s a chance that pendulum swings back? Because in my mind it has to at some point. And I’m just curious when

Orphe:
Yeah, I mean in our data it is interesting because the types of units people rent are very different from the types of units people buy.

Dave:
That’s a good point.

Orphe:
And when you compare apples to apples, the gap’s actually not that big. So renters are basically renting different homes, renting smaller homes, even in the case of single family homes. So you see more people renting smaller town homes as opposed to people buying larger detached single family homes. And so there’s that. I think that we’re going to see rent growth pick up again, but it goes in cycles. So when rent growth picks up a lot, well, what do you think builders end up doing? They’re like, oh, okay, this is getting attractive again. And so you start to see flows money going back into building these projects when it becomes profitable to do so. And so in terms of the typical rent and the cost of home ownership, I don’t think we’re going to see a big closing of that gap, if you will. But if you want to compare apples to apples, I don’t think the gap is very big to start

Dave:
With. Okay. So we’ve talked a lot about the big things that we are always talking about on our show here and on the market inventory. We’ve talked about rates, demand. What aren’t we thinking about orfe that we should be thinking about in 2025, about the housing market? What are some of the topics, the issues that are on your mind that help you sort of think through what’s next for the housing market?

Orphe:
I think everything we can do to improve housing affordability, we should do, and I think it starts by unleashing builders, allowing builders to continue to build housing. We saw during the pandemic that builders, they went all in places where they could, right? Places where they didn’t have to contend with minimum parking requirements and minimum lot sizes and height requirements and all that stuff. They leaned into higher density. The fact that builders are building smaller units is a good thing. Family size is shrinking. People are not having four or five kids anymore. That’s just the way it is.

Dave:
Yeah, I mean, if you look at that data, what the average starter home was, I think it’s in the seventies, is something like, don’t quote me on this, but the trend I think is right. It was like 1400 square feet or something, and now it’s like 2,400 square feet. It’s almost doubled. So some reversion of that trend towards larger and larger homes almost feels inevitable.

Orphe:
It’s necessary. Allowing builders to build up as well is needed. Allowing families with the extra space to build ADUs in their backyard,

Dave:
Whether

Orphe:
It is to put it up for rent or to actually have their family members move in, that’s needed, right? And so I think we’re going to continue to see that. I think the more affordability makes the headlines, the more you see governments starting to talk about the issue more seriously and starting to act on it.
I think that’s good news for housing. I think you can’t talk about the housing market ultimately without having advice for buyers. And today, when renters in the market today, if you’re a buyer, take advantage of financing tools. I know you guys have great tools as well on BiggerPockets in terms of affordability tools and calculators. We have the same thing. Zillow Home Loans has a tool that’s really cool. It’s called Viability. What it allows people to do is put in their financial information and then on Zillow app, on every house, they get a tag that says, Hey, it’s within your viability. And it fluctuates in real time with mortgage rates. So when mortgage rates fall, you get more homes with a tag that says it’s within your viability. Oh,

Dave:
Cool.

Orphe:
And so we have tools like that, but we also have down payment assistance at the local level. Those are things that are available to potential buyers out there today.

Dave:
That’s great advice. I really appreciate it. And everyone you can check out those tools. If you’re like me, you’re probably scrolling on Zillow anyway, so there’s a lot of good stuff to check out.

Orphe:
There’s also great stuff for investors. By the way, Zillow is now the largest rental marketplace in the country, so there’s a ton of stuff. Zillow rentals has a ton of stuff for investors, calculators, all that stuff. And I think for renters, one thing we do for renters is we make sure that if they make their rent payments on the platform on time, rent payments are reported to the credit bureaus. I bring it up because it is Black History Month and less than half of black households own their home in the United States home. That data tells us it’s mostly lack of credit. History is a big problem. And so having your utility bills phone bill reported to credit bureaus to make sure it counts, but also your rent payments to make sure they count towards improving your credit, I think is crucial. That’s how we’re going to get more people access to housing.

Dave:
That’s great advice. Thank you so much. I appreciate you sharing that with us, and thank you so much for being here. This has been a great conversation. Thank you so much for sharing everything that you and your team at Zillow are doing. We’ll obviously put links to all that stuff below and hopefully next time we could do this in person Orphan now that we are neighbors living in Seattle.

Orphe:
That’s right. That’s right. We’ll invite you over and we’ll do it live.

Dave:
Awesome. Well, thanks again and thank you all so much for listening to this episode on the Market. We’ll see you next time.