Nikolas Scoolis is the Manager of Housing Economics at Zonda Research, the #1 provider of housing economic data in the U.S. In this episode, they dive deep into the supply/demand imbalance, what caused the massive run up in prices over the last year, and discuss Nikolas’ forecast for housing in 2022. Nikolas believes we are at a transition point in the market, and discusses how inflation, interest rates increases, and geopolitical factors will potentially affect the housing market. You don’t want to miss this episode!
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2022 Housing Market Forecast w/ Nikolas Scoolis
We got an exciting interview for you with Nikolas Scoolis. He’s the Manager of Housing Economics at Zonda research. It is the number one provider of housing economic data. This is something that’s important for us in the business that we operate in and for our investors. This is a great interview. There’s a lot of good data in here. I recommend reading this a few times to pick up all the nuggets but he hits on his forecast for the 2022 housing prices.
Where are the housing prices and the market going. Also, how is it all going to be affected by interest rates, oil and Ukraine. It’s super good data. I hope you enjoy it.
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We are joined by our guest, Nikolas Scoolis. We’re excited to bring him on. He is the Manager of Housing Economics at Zonda. Nikolas, give us a bit of your background and what Zonda does.
I’m the Manager of Housing Economics at Zonda. Zonda is the largest national data provider of housing market data as well as consultancy. We help underwrite developments as well as other projects. Within the Zonda umbrella, we operate Builder.com, which is a big media presence in the space.
I’ve been following your research for a little while and I love the data you put out and with some of the strategies in the single-family market, it’s very relevant data. I want to bring you on to get a sense of where’s the housing market at now. A lot of investors have the sense that maybe we’re entering bubble territory with some interest rate hikes, how does that affect affordability and the price. We want to dive in. We have a lot of territories to cover. Can we start with the big picture, where do you see the single-family residential market has been? We’ve discussed offline, maybe we’re at this transitional point. Where is it headed? Give us some real big picture or backdrop here to set the stage.
As you said, this is a bit of a transitional point because we’re coming out of about pre-pandemic. We were in a period of strong historical demand. It wasn’t pre-Great Recession strong but it was strong enough that it was pushing housing forward, prices were going up and we were seeing increases. As the pandemic hit, we had that initial pullback with the uncertainty that came in the first two months of the pandemic. We didn’t know how it was going to happen.
As it became our new normal, we moved into this supercharged demand phase because it wasn’t a stimulus that was being received and given out, it was also the creation of this new buyer segment, which we call relocation buyers because people were given the opportunity to reevaluate their living options and say, “What am I looking for in a house?” The house became our everything, office, gym and schools even, not for me personally but for many.
There was a reevaluation of, “Do we need to live in this smaller place or can we move somewhere that could give us more of the things that we’re actively looking for now?” With that creation of the relocation buyer, markets that may have been under demand became in high demand. You see these people fleeing and taking the equity that they’ve accumulated when prices started going back up and taking that money out and investing it into what is seen as “relative affordability” because maybe a $600,000 home is expensive in one market but if you’re talking about a California homeowner who’s seeing average home prices of about $1 million, it looks like chump change.
It’s an easy transition and started fueling demand in places that we had never seen and time to turn the market into a supercharged housing market, which was intimidating for most people, if you didn’t have that equity or some significant down payments. Now, we’re moving into an area where rates are starting to increase, which is making affordability for those not fully cash buyers look a little more intimidating.
Rates going from 3%, even though we were sub 3 at the end of 2021 to 4%, it’s equivalent to a top-line price increase of about 13.5%. If you pair that with the appreciation we saw over the last few years, where some markets were appreciating almost 30%, we’re getting into an area where there’s a lot of ground that’s been made up in terms of the demand of what prices or what the value of the home might be so we’re in a new period. Going forward, navigating that space will be interesting.
Before we jump into going forward, let’s look back. What has been the other factors creating this outsized demand? Relocation buyers is one. What about household formation? I’ve been reading about the Millennials and suddenly decided to do household formation and a little bit late bloomers but they’re getting on with it and is that a factor?
Of course. Millennials are the largest living generation and we’re moving through that stage of where traditionally the households happened, forming, getting married, having kids and that leads to it as a need for more space. Fundamentally, the desire for nesting and homeownership is inherent but people value the flexibility that renting brings.
[bctt tweet=”Fundamentally, the desire for nesting and homeownership is inherent, but people value the flexibility that renting brings. ” username=””]
When the opportunity presents itself that homeownership is attainable, people do want to jump on it. I fall in this category. We’re looking to buy but haven’t been able to find the right option. That inherent force and then as we progress, even now Gen Z is starting to move into the labor force, which will again bring even more demand going forward.
Those are the two biggest factors that you would say and are there any others that are demand creation factors?
Low rates, absolutely. Not only is it like low rates make the monthly payment more affordable, even at a higher price, there’s also what we’re seeing right now as rates jump, it’s counterintuitive but we’re seeing people say, “Rates are jumping now. I need to lock into homeownership to lock in that rate before it gets higher and worse.” If you look at the most recent releases in terms of home sales, the home sales are still strong even as the rates jumped 60 basis points in three weeks.
High demand and I’m not sure you would agree but if you look at consumer consumers statistics now, you’re seeing household net worth has hit an all-time high. It grew 20% since 2020 across the United States on average. If you look at household personal income per capita it grew 15% since 2000. We’re seeing an extremely healthy consumer and healthy job market. People are feeling flushed. They’re feeling like they’re on top of the world and in command of their career. They’ve got a little bit of cash in the bank and an income coming in.
If you have that nest egg, you feel safer about taking the leap into the investment, as well as other aspects contributing to that net worth growth as the stock market has been historically successful to the run-up in equity prior to the pandemic as well. You have all of these aspects creating this demand.
Huge demand meets limited supply. As I’ve been contending for several years now, forget demand. There’s just no supply and the reason is that if you look in the charts of new homes built and new single-family dwellings being built, it fell off a cliff in the great financial crisis and it never recovered. It’s sitting down near nothing. Only in the last few quarters, it finally ticked up into a subnormal range but it’s at a historic low, a 30-year low. If there are no new homes being built, if you have any population pressure or any demand, you’re going to see price increases.
In 2005, before the great financial crisis, you could buy a lot, build a home and you could sell it pretty much anywhere in the United States and you would make a profit. Now, that’s not true. You buy a lot. The lots are more expensive. You build on it while there’s been inflation, building materials and more expensive then you sell it and you’re going to lose money.
My contention is that you either need to reduce the cost of labor and materials, which is never going to happen or prices need to go up. Until there is greater supply in the housing market, you will see pricing pressure because there simply are no new homes being built meanwhile the population is increasing. Would you agree with that?
Yes, I would. I would like to preface though, the initial underbuilding out of the great recession was partially due to the overbuilding a couple of years before. There was a leftover product that needs to be accounted for but then after that stage, there was underbuilding because there was a mentality shift or a psychological shift where builders were a lot more nervous or safety first, making sure that this was really coming out of the Great Recession. They wanted to make sure demand was real and then that led to a period of underbuilding, which course has got us where we are now.
We’ve created an in-house this thing called the Zonda Lot Supply Index which isolates out vacant develop lots, which are lots that are ready to be built on now. If you look at where it was several months ago to where it is now, every single market is completely undersupplied by double digits, 20%. We’ve shifted. Any lots that the builders had prior to the pandemic are gone develop-wise.
Further down the line, we call them total upcoming lots and those are the ones that are gone from a grass field to starting to being worked on slowly and that number has increased about 20% from where it was a year over year. We know builders are responding as fast as they can but there are issues with supply delays and labor shortages, those things that push that process slower than it historically has.
Your lot index was lots that were ready to build, you’re seeing those and that number has shrunk like crazy which would mean that they’ve been built on?
They’ve been absorbed.
You have a further upstream metric that is looking at that new lots being developed and that you’re seeing a lot of activity in that but it’s slow.
We talk about how many months does each stage typically takes and it’s obviously slower than normal because of all the shortages you mentioned but there are lots coming. Builders now are all rapidly trying to fill this demand with lots but even so, the amount that’s increased is only about 200,000 lots on a year-over-year basis. That’s not that many in the long-term demand picture. There are lots coming but is it enough? It doesn’t seem like it.
Every market in the United States is undersupplied roughly by 20%? How did you derive that number?
We have local experts across the country and we try to come up with an individualized number. This is for major metros. We have a list of about 30. With the local experts’ help, we determine how long a lot would have to be through the process to be considered absorbed. We use that number and then we look at the months of supply and we adjust that number based on where the activity is taking place. We give more weight to higher demand areas and then use that number relative to that equilibrium number we’ve derived. The shift is crazy when you look at it nationally. From what was considered maybe relatively appropriate down to about 80% below equilibrium in some places.
A month’s supply is an easy metric to look at of how much available inventory is there to purchase right now and the average is somewhere around six months is that right?
For equilibrium, yes and it fluctuates. On the existing side, it is about six and on the new home side it’s a little bit lower.
Even though we see new home construction or new home starts as published on the FRED data, I look at, we’ve seen that tick up. You’re basically saying it’s not going to accelerate any time in the next couple of months. It’s still going to be held down because of these upstream issues. We don’t have new lots coming available being built. We’re likely to see the supply continue to be constrained for the next several months maybe.
We hear from builders all the time and they tell us, “We’re building more.” We see it trickling through the data, it’s just slow and it’s not enough. Also, the process is that a lot of builders were selling homes as sales before the homes were even constructed. Sometimes the lots we’re seeing and tracking or the storage we’re seeing in tracking are already sold so that doesn’t fill the demand that’s still out there.
Is your belief that the economics of home building is there and in many major Metro areas the builders can afford to build and profitably build homes and create new supplies?
[bctt tweet=”While wages are growing, most wage gains happen at the very bottom.” username=””]
Builders primarily pass the cost increases on. Who they’re targeting as a buyer is important going forward. I’m a proponent of right-sizing. A lot of builders will pass increases in terms of per square foot basis, maybe rather than a top-line basis to keep homeownership attainable. That means building smaller homes or charging more per square foot rather than building a bigger home maybe.
It’s because that top-line number is more unrealistic for some people. It’s how do you engage those entry-level buyers in a lot of markets or buyers that are looking for first-time homeownership at whatever price point. With the rate increases, if you’re not an all-cash buyer, you’ve already experienced double-digit appreciation in two months on top of 20%.
Let’s shift to a new regime here with interest rates spiking up primarily because of the inflation metrics plus the Fed as well. That’s going cool demand because affordability, as you point out, drops significantly. The payments increase, as you’re saying, by 15% which means that you can buy 85% of the house you could buy before. On the other hand, as we’ve said, we’re not seeing a new supply. We’ve got a war here between a lack of supply against possibly cooling demand.
On the demand side, even though we may see an affordability issue with rates increasing, we have seen pretty dramatic wage growth over the past year. An increase in housing costs is relative to overall income. It may not be as dramatic and you track that data and see what the impact could be.
I look at the interest cost as a percentage of your income, it’s not that bad. I’d like to hear how you’re measuring affordability.
It’s in multiple ways. We look at the straight ratio of price to household income and we calculate on a monthly payment basis. We take the income data then divide it by income by household so the number of households in each income bracket and then when we divided out and calculate what the “affordable line” is. That would be assuming 30% of your income to housing at the rate you’re looking at and then we can calculate an affordability ratio with that.
Looking backward, affordability wasn’t that bad because of how low rates were. I got quoted at a rate of 2.62%, which is historically like nothing but now, it’s shifting. That’s the picture we have to look at. While wages are growing, most wage gains happen at the very bottom. There’s been a readjustment of what acceptable minimum wages or what workers are willing to accept that is. That jump has been the biggest going from $10 an hour to $15 an hour and that’s a 50% jump but that isn’t a big driver of homeownership because, at that wage, you’re not affording a house.
You’ve broken down the metrics of affordability in a very detailed way to assemble your affordability data. It’s very interesting. Although, again, I would argue. I’ve been a big traveler in Europe and Asia and housing is way more expensive in urban areas in Europe and Asia. How affordable is affordable?
I trust your expertise on that. I would pose the question of how is the cost-of-living and the other aspects of life relative to housing but that’s out of my realm of knowledge.
Talk about how the affordability crunch in housing impacts maybe the shifts in the demand side. Does that push more people to rent longer? Talk about how that impacts the demand side.
What my gut says is how people almost universally would prefer to own than rent assuming a level playing field. If you’re comparing the house-to-house basis, you’d rather invest in something that could be yours and that could increase your wealth than not. If the household you want, you can’t afford where you to live and you can’t afford the size of the house, you look to rent and we’re going to see continued rental gains as people continue to get priced out of houses.
Our multifamily division is run by a team in Texas and she said, “This is the hottest multifamily market she’s ever seen ever.” On the multifamily side, in terms of institutional investment and apartment complexes, there is a very significant amount of supply coming on that way. That poses some questions about the long-term growth there but if you’re an individual owner of single-family rentals, you’re in a very good position. Especially if your location is good and you’re in secondary or tertiary job markets, which may have a lower cost-of-living than San Francisco, Los Angeles, New York but still have enough lifestyle to attract those young families and the next generation of workers.
We’ve seen the data on rent growth and it was around 15% year over year. It’s insane. You can talk about unaffordability of single-family ownership but you got the same issue on rents increasing. Housing is getting less affordable and whether you rent or buy.
It will be a pendulum shift. The nature of the beast is charged what you can get and eventually the pendulum will shift too far and then it’ll shift back. We’ll settle on to whatever the new normal is.
The price to rent ratio, are you tracking that? It’s interesting because we pay a lot of attention to the Midwest and the Midwest is still quite a bit cheaper to buy than to rent. If you look at PITI, it’s significantly lower than rent in most cases. I think it’s reversed on the coasts, in California, New York in particular but it’s not in other areas. Do you track that and what are your thoughts there?
Yeah. It is something we look at. We work with a lot of home builders about what product you have to deliver to make homeownership more interesting there. We published something on what areas are the most interesting for entry-level buyers and a lot of them did come up in the Midwest like Chicago, Cincinnati, Indianapolis because of the mix of lifestyle and opportunity as well as the mix of younger people there because of that attainability.
Going back to your pendulum idea there. It’s interesting to me to see that as affordability becomes less attainable, one of the ways to solve that, you made the point earlier is to increase density or decrease the square foot and you increase the price per square foot. You’re also seeing at the same time a pretty big shift, especially from the bigger metros and the coasts where a lot of net migration is wanting to go to more of the suburban to more of the sprawling homes. Maybe there’s a drive to that right now but it would come back and the prices continue to run up where the builders have to go back down to that smaller square foot.
You’re 100% right because when you’re making that decision to leave say, San Francisco, to move somewhere else, you’re giving up that lifestyle component. When you’re comparing prices say, a few years ago and you’re looking and say, “I want to move to Phoenix because it’s X percent cheaper than San Francisco.” Phoenix has appreciated at a rate maybe three times as fast as San Francisco has over that period. Now, your trade-off is a much harder conversation. It’s like, “I’m giving up San Francisco for this but now Phoenix is only 50% cheaper, rather than 80% cheaper.” There’s definitely a conversation to be had.
Who were the net losers in relocation? I read some articles maybe a few years ago about some of the larger, very expensive metros where net losers is that accurate? Where is that now?
At the time, for sure. San Francisco’s rent has not fully recovered yet. It’s still below where it was a few years ago. I’m speaking anecdotally, New York is the ultimate pendulum of this. It shifted because the city was so dead. It shifted maybe rents were half-off and now rents are maybe 20% above where they were. There’s always going to be a demand for those expensive cities for certain people. They were the net losers of the relocation buyers but now, employers are starting to call back employees to the offices.
Google set their date in March. They probably set the date 4 or 5 times now but if that’s real then there’s going to have to be some decisions made. It’s, “Are we going to go back to try to get the wages that we’re accustomed to from these big tech hubs or are we going to, be willing to sacrifice that and look at something different?”
To your point on the relocation buyers because a lot of these companies went virtual, employees had, “Where do I want to be? I can work anywhere at this point.”
One of the largest markets was Boise. It’s this beautiful mountain town.
It’s over 30% of appreciation there.
[bctt tweet=”No one likes uncertainty or volatility. ” username=””]
People became lifestyle buyers and we’re making a change in lifestyle. It’s hard for me to see that’s going to disappear, especially because I work at office space. I think there is the return to work but there’s going to be a huge swath of the workers who continue to be virtual and choose the lifestyle locations.
I 100% agree. I work 100% virtually now and I can’t see myself going back full-time ever. Once you get that carried out, it’s hard to retract, especially in a job market where we’re at where it’s still hard to get employees in general, even virtual employees. It will be interesting. The conversation where it gets tricky for the employees is once there are cost-of-living adjustments to their wages. If you’re working for a tech company that’s based out of San Francisco and working that tech company wage and then you move to Boise is the tech company going to adjust your wage for the cost-of-living relative? It’s a big thing. You’re making less money
The cost-of-living adjustment is down so they’d reduce your salary.
That’s a big conversation being had at big firms.
Has anyone done it yet or that’s just speculative?
I believe Google made pretty big progress in implementing it but then got a bunch of pushbacks. It wasn’t even ridiculous. If you were based in New York and you were living in Connecticut, as people did that commute prior, they were adjusting your income down. If you were working full remotely in Connecticut, even if you did work in New York before and made that commute.
That’s going to be a tough one. It’s hard to take people backwards. You can’t do it, especially in this environment.
What are the markets conversely are the winners in this relocation?
Those secondary and tertiary jobs, areas have lifestyle attractions. Places like Tampa and Jacksonville are big winners. Places in the Midwest like Indianapolis specifically have been a big winner in terms of housing. It sells by far the fastest, new home wise. Charlotte Raleigh and a lot of smaller states. Austin continues to be insane. I still think there’s room to grow in Austin as well but if you had bought in Austin a few years ago, you’d be a very happy person.
What’s your forecast for 2022? It sounds like you’re saying flat price growth and slowing sales.
We’re forecasting growing sales because of the increases that we are seeing in supply, even though it’s not substantial because the way 2021 ended on a new home basis, it trickled in because there was that conjunction of all the homes being unavailable. We do think there’s going to be home as being delivered, especially in the second half of the year.
We’re forecasting on a year-over-year basis because 2021 declined from the year prior of about 9%, which seems substantial but it’s only an increase of about 15,000 from what 2020 was. It’s at about 8.39%. For prices, it’s much harder to gauge because we’re obviously still at about 15%, 18% year-over-year growth but it’s going to taper down significantly. We could end the year at 4% or 5%.
You’re predicting growth, a may be a more normalized growth.
Slowly but growing.
Especially with inflation at 7.5%, it’d be pretty hard to predict housing would not keep pace, to be honest. You’re saying there’s going to be definite pricing pressure. I’m not sure I see that with the supply shortages everywhere but possibly.
As I said on the new home side, there’s going to be per square foot gains snuck in that aren’t on the top line that isn’t tracked the same way.
How do you think that the supply crunch is solved and when does that get solved? If we’re still in this high inflation environment with materials and labor are still very difficult to come by, it seems like that’s going to be a bigger issue for a longer period of time.
I agree 100%. If you’re thinking about single-family homes, the way you solve it is with density but whether that’s realistic in reality, I don’t know.
We’ve seen lumber prices spike up at 5X or something like that during COVID and then it crashed down. Now, it’s almost back to where it was before. I’m a firm believer in capitalism. Deploying capital to where it can make more capital. I promise you those sawmills are figuring out how to solve that stuff and it’s going to come back down. There’s no systemic problem, it’s supply chain issues.
We’ll see inflation ease a little bit. Oil is the wild card but besides that, we’ll see things ease and as that eases, you’ll see builders readily stepping up and cranking up as fast as they can. Labor is a bigger problem. What happened when we had the great financial crisis, the jobs disappear. The trades, framers, drywallers and the plumbers, the jobs and people go away. There’s a shortage of skilled workers in the construction trades that’s going to be very difficult to scale up.
Especially the jobs that are above where they were prior to the pandemic and they were one of the first ones to hit that figure. It’s how much further can we even go above that. It’s not like in a lot of industries where we’re below where we are and we’re trying to fill that hole again. Constructions are above and trying to add more on top of it. How do you attract it?
Every construction company I know is dying for labor. They can’t find good labor. They’re saying that it doesn’t exist. The supply crunch is going to continue for at least a couple more years. Hopefully, we’ll see inflation ease and more product come on the market.
Your forecast for 2022, it’s about 4% to 5% growth in the single-family market as a whole by the end of the year. There’s going to be some outsize winners and they’re based on some demographic trends. Do you see that continuing into 2023? Do you see it slowing down even further? What do you guys see a little bit further out?
Continuing moderation until we can get that more supply paired with when rates decided to come back down, which I don’t think is in the near term.
Shifting a little bit on something that’s in a lot of people’s minds, this current crisis in Ukraine, does this become a domino effect that starts a global recession? Talk a little bit about your perspective on how the Ukraine crisis impacts real estate. If you have data from every historical crisis like this and how that generally plays out.
It’s a hot topic for sure. It’s something we’ve been asked about a lot. Anytime there’s something that topical, it is. Based on the analysis we’ve done, it seems like the direct impact on the United States economy will be pretty minimal. There’ll be a couple of percentage points shaved off of GDP, probably due to oil prices being high but the amount of the oil reliance that the US has from Russia directly is pretty small. It’s about 8% of total imports that doesn’t account for domestic production at all.
The more pressing issue aside from the humanitarian side is EU relies on Russian oil very significantly. It’s about 30% of their total consumption, maybe even 40% depending on where you’re sourcing it from. We’re all globally connected. If the demand in the EU goes down for US goods and services, it could trickle down into our economy pretty significantly. The uncertainty is the biggest factor because no one knows what’s going to happen whether the war ends shortly or is dragged on and prolonged. How the EU has and then how that EU impacts us is my biggest worry in that sense, rather than the direct impact that the Russia-Ukraine has on us.
I was reading a report from Goldman that said that every $10 per barrel increase in the price of oil will add about 3.5% into inflation numbers and to a 0.1% drop in GDP for the United States. That’s their take. You’re right, there is an outsized risk in Europe that it could put Europe in a recession if we see shortages and/or price increases for Russian oil. It’s interesting even though the oil trade wasn’t embargoed and sanctioned, we’re seeing a lot of voluntary sanctions happening. Companies and banks are refusing to transact. Insurance companies are refusing to provide insurance for the Russian trade.
It’s happening and it’s going to be a lot harder in Russia than it is on anyone else. The Europeans are stalwarts on this. They’re not backing down. It’s interesting because it was a different topic but we’ll see some really different political outcomes here where Europe will try to get energy independence from now on. There’ll be more demand for NATO. What is Finland? Who wants to be the next Ukraine when you’ve got this bully with guns? Everybody’s going to say we’re joining NATO. We’re getting majorly off housing but it’s a real shift in the political climate and economic climate.
No sense of geopolitical expert but what you read is just knowing can gauge what Russia is going to do next because it’s out of the realm of rational thinking. You’re going to tank your economy to fulfill this dream of reuniting the USSR. The uncertainty is the big question and that’s what’s scary. No one likes uncertainty or volatility.
On the other hand, it could be this whole thing suppresses interest rate increases.
What happens if it suppresses the interest rate and the inflation keeps going up, although I’m a believer that inflation will work out once the supply chain works out. When is that going to be?
This is great. Nikolas, what’s the best way if readers want to get their hands on some of Zonda’s research and get in the mix of things you guys are doing. What’s the best way to connect with you all?
It’s ZondaHome.com.
There you go. Nikolas, thank you so much for sharing these very juicy details, helpful insights and we’ll have to have you back on maybe periodically it is to share updates on the housing market. I hope this was helpful for our readers. We appreciate your support and any five-star reviews you want to leave and share this with your friends. Thanks a lot, Nik.
Thank you so much for having me. I appreciate it.
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About Nikolas Scoolis
Nikolas Scoolis is the Manger, Housing Economics for Zonda. As a part of the Economics Department, Nikolas constructs data analysis models for Zonda, works on custom research projects, and presents nationally on housing and economic trends. Nikolas is also the lead architect for the Zonda suite of indices including the New Home Pending Sales Index and the New Home Lot Supply Index. Nikolas’s work has been featured in the Wall Street Journal, CNBC, CBS News, and the Bloomberg Terminal.
Prior to joining the Zonda team, Nikolas worked for another real estate analytics firm running market research and analysis. Nikolas holds a Bachelor’s Degree from San Diego State University in International Business and Economics.
