First Principals Thinking on Housing Appreciation – My Zestimate is Going Bonkers

Are you one of the many Americans that constantly checks your phone to see their Zestimate go up and up and up? This has been me for awhile but I’m starting to question why houses have gone up this much recently (COVID times). I’ve heard a couple ideas/thoughts but want to take this time to jot down some of my thinking.

While I’ve been using the Zestimates like gospel and while I thought they were basically like a best fit line on certain markets, taking into account comparable houses and recent sale prices of that specific home, but I didn’t know for sure. I thought I should start with what actually goes into the Zestimates. Zillow’s website has a lot of information but let’s start here:

I suppose I wasn’t far off on that assumption. Sounds like they’re essentially keeping a large database and trying to find the number that best reflects what other similar houses, in similar areas, are going for. I would expect if you have a really unique house that the Zestimate would be further away but by and large if you have, for example, a 4 bedroom, 2 bath, in X school district in the 28270 zip code it will be close to a predictable number.

Next question would be, “For the houses that are listed, are they selling close to their Zestimate?” I just looked at Charlotte to start, but you’ll see for the active listings about 90% sold within 5% of their stated Zestimates. That sounds pretty good to me. If my house is sitting at 380k I’d be feeling good about being able to get at least 361k. This house appraised for 323k just one and half years ago.

So what’s causing the hike?

While I would not say that you should think like this I hear a lot of people say, “I can afford X dollars per month.” I’m going to go through an example of this and see how this type of thinking could come into play. Let’s say Doug can buy a house right now for 300k at a nominal monthly interest rate of 4%. His monthly payment, for principal and interest, would be $1,432.25 because that is the amount he thinks he can afford. But let’s now think what would happen if rates went down to 3% tomorrow. If he still shot for that 300k house he’d only have to pay $1,264.81 per month and would be very happy I’d imagine but… There are people now, that were buying houses for less than 300k, that now all of a sudden can purchase that 300k house Doug was interested in. Well Dougie aint having any of that, so how much can he afford to go up and outbid them?

He could afford $1,432.25 at 4% and can still afford that amount at 3%, but what would that equate to for the sale price of the home? It would be $339,714.49. So he might get it somewhere in between but he’d probably be willing to go up to that amount. I did some calculations for a monthly payment of $1,432.25 and what sale price that could afford at different nominal monthly interest rates for 30 year mortgages:

And what have rates done recently? Here’s a chart looking at the 10 yr Treasury and 30 yr mortgage rates through the end of year 2020:

We can see the last couple of decades rates have been going down. In our little example when we went down from 4% to 3% we’d be able to buy about a 13% more expensive house on a 30 year mortgage. So maybe the rates going down can explain some of the increase in prices?

Here’s the 10 yr Treasury showing the end of 2020 through current time. The rates you’ll see have recently started to creep up, and since mortgage rates tend to rise and fall with treasuries, we’d expect prices to go down… WTF?

OK. So what else do I know or what have I heard? I’ve heard that inventory is very low. Let’s investigate that. That does appear to be correct. From the US Department of Housing and Urban Development (HUD) we see the monthly supply of houses has been going down (“The months’ supply is the ratio of houses for sale to houses sold. This statistic provides an indication of the size of the for-sale inventory in relation to the number of houses currently being sold. The months’ supply indicates how long the current for-sale inventory would last given the current sales rate if no additional new houses were built.”).

Supply going down would definitely increase prices, all else being equal, and it kind of makes sense when people are hunkering down during a pandemic. But wouldn’t demand be down right now too? Before heading back up to Michigan I did notice I had two new neighbors in Charlotte, both families from New York. Let’s try to look at migration patterns. I’m up to hear from other sources but the first thing I thought of was U-Haul, and sure enough they have some migration growth numbers:

2020 Migration Trends U-Haul Ranks 50 States By Migration Growth | U-Haul Blog | U-Haul

North Carolina is top ten and Michigan, where my rental properties are, did move up in the rankings from 2019 but were only ranked 40. One very specific thing to my Michigan properties was that a neighboring town had a dam break that caused people to leave to neighboring cities. My property manager said this has been big for housing in surrounding areas and he’s been super busy getting requests from renters looking for new housing.

And then there’s the money printing our government has been doing, which does seem to complicate the situation. The easy thing would be to say it absolutely drives up prices but would it be affecting housing this fast? I don’t know.

Now I don’t know a lot about these money supply metrics but I would think it’d be simple, the total number of USD in circulation, but it doesn’t seem so simple. I found this M2 metric but oddly enough it’s now been discontinued and the new metric looks to change the definition. This doesn’t give me a trusting feeling because it makes me question, “Is the printing even worse than advertised?” I welcome any insights on this topic.

I’m literally more confused than when I started writing and will probably need another post to analyze this. Right now I think I’m chalking up my appreciation to

  • Increase demand in my areas
  • Less inventory
  • Historically low rates
  • Money printing

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