Dr. Svenja Gudell is the Chief Economist of Zillow. She joined the company in 2011 and was named chief economist in August 2015. Under Dr. Gudell’s leadership, Zillow produces monthly reports on housing trends for more than 450 metros nationwide, with data often available down to the ZIP code level. In addition, Dr. Gudell and her team publish original research on various real estate topics, ranging from rental and mortgage affordability, negative equity and forecasting, to policy, generational and mortgage research. Dr. Gudell has presented to various federal agencies and at numerous industry conferences, and has been widely quoted in national and local media.
Economic growth was only 0.7 percent in the advance Q4 estimate and has been slow for Q1 in the last few years. The most recent BLS employment summary showed job gains of only 151,000 for January. When do you see these headwinds turning around, and what will it take?
When looking at the GDP numbers and taking them apart, we came in slightly below consensus, it was a bit of a drag that consumer spending only modestly rose. It would have been nice to see a little more there. Gross private investment was a little weak, and a lot of that has to do with people buying fewer homes. A bunch of other things played a role in seeing weaker GDP growth than expected. For the future, I think it would be good to see more investment in housing come through. Economic progress usually leads the housing market. We’ve seen a lot of housing lead the economy lately. It’s nice to have a strong housing market to help with the economy as a whole, because housing is a huge part of GDP growth and the overall welfare of the economy. We’ve been in a tough spot because a lot of household formation has come through as rentals. We have many fewer people buying homes than they have in the past and many more making the choice to rent. We’re seeing a bunch of headwinds on the side of renters wanting to become homeowners such as saving for a down payment amid very high rent, being able to qualify for a mortgage, and actually finding inventory. That last point will be a key point as we move into the selling season this year. There’s just very little inventory out there, and without having more inventory, it’s really hard to have a very strong season. Limited inventory will surely mean that prices will go up, and we will once again see fairly good home value appreciation with solid demand for housing. However, if you don’t have enough homes available to buy, then the existing-home sales won’t pick up as much, and eventually that will filter through into the GDP numbers as well.
Having said that, there is a tradeoff there with construction. We’ve been seeing the economy do better and we’re adding more jobs. Consumer sentiment is okay in a sense that people are, so far, not scared off from buying homes and they feel secure enough in their jobs. If they can, builders will start to ramp up production of homes to fill the gap of some of those inventory needs that we’ve been seeing across the country. It depends on which sect wins out in the end and how fast we can build some of these homes.
Wage growth was up by 2.5 percent year-over-year in the last BLS employment summary, one of the positive takeaways from that report. How much of a difference is wage growth going to make in household formation in 2016?
Wage growth is key. We want to see very good income growth for several reasons. We have been talking about our trouble with rental affordability for quite some time now. Having more decent wage growth will certainly help that. You want people’s wages to at least keep track with some of the increases we’ve been seeing in housing costs. That’s been a bit of a dire situation. You want to see wage growth when you’re talking about household formation switching from into buying homes for sale, and that will happen if people feel richer and are better situation to make that home purchase.
Some reports say the homebuying season this spring will be the best in a decade despite uncertainty in financial markets. How do you see the spring homebuying season playing out? Do you think the recent slow economic growth will have an effect?
There has to be a more direct effect. GDP growth is usually an effect of other factors going on in the economy. The biggest things that will impact housing or people’s desire to buy homes is their income, their employment status, and their sentiment toward how the overall economy is doing. They feel a lot better if they have a steady job and they feel a lot better if their incomes are growing—those are two really important things. Sometimes people get a little skittish when you have overall global things happening, like the Chinese market, which affects our stock market. That definitely affects people’s sentiment. When the stock market goes down or is weaker, it not only makes people feel more skittish, it actually directly impacts their wealth if people are invested in the stock market—especially folks who have a large portion of their compensation as options. We’re talking a lot about tech jobs lately, and they certainly have options, RSUs as equity compensation, and a lot of those will be used for down payments for a home at some point. As they lose value, that will have a direct impact on their desire or their ability to buy a home. Some of these things do matter, and we’ll have to see how that plays out in the coming months.
I do think from the numbers we had last year that it will be a fairly strong buying season. We have a lot of leftover demand. We are continually undoubling households that doubled up during the housing bust, where students moved in together, or young professionals moved in together, or people moved back in with their parents. As those people move out of their parents’ basement and get jobs, those households will then decide that it’s a good time to buy because financially it makes a lot of sense for them to buy. Given the still-low inventory levels we’re seeing, that will continue to drive prices up. We’d like to see more sales than we will see, but I think price appreciation will be quite good going into the season.