Zillow Chief Economist Discusses 2018 Trends - Interview | Think Realty
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Zillow Chief Economist Discusses 2018 Trends

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Svenja Gudell started at Zillow in 2011 with her first project of calculating negative equity, and she’s probably one of the few homeowners in the country who would tell you that the topic has “a special spot” in her heart. However, that special spot, such as it is, is one of the driving forces behind the Zillow chief economist’s passionate dedication to housing data, both the expansion of the available volume and its accurate, in-depth, accessible analysis.

“It was shocking to me at that time to do that research and find out how many people were underwater at the height of the housing crisis and to then realize how many people were still underwater. That kind of information has such a tremendous effect on a homeowner’s life,” she said.

Six years after that initial project, Gudell is fully committed to Zillow’s stated mission of shedding light on the dark places in housing and helping homeowners, real estate investors, and housing professionals make informed decisions about their personal interests in real estate. “Everyone has an interest, whether they know it or not, in real estate. Everyone has to live somewhere. To me, the more and better access everyone has to information about real estate, the better the market will perform and the better off consumers will be,” she said.

“As economists, we sometimes talk about these things in ‘nerd fashion,’” she laughed, “but really, it’s so important to get as much information from as many reliable sources as you possibly can. Whether you’re buying a home or buying an investment property, a real estate purchase is likely one of the biggest purchases you are going to make. You shouldn’t just be crossing your fingers. You should know what you’re dealing with. Data, information, and analysis help you do that.”

Digging for Data (And Details)

When Gudell started at Zillow in 2011, the company was well-established but not necessarily well-known. “When I applied for an economist position here, I actually thought, ‘Oh, what a funny name,’” she recalled. Today, the real estate data giant tracks the value of more than 110 million homes using its trademarked Zestimate and is ubiquitous in real estate circles, although some real estate professionals certainly utilize the website and its data more than others.

For Gudell, however, the main point is not providing ammunition to a buyer or a seller, as is so often recounted with chagrin by those who are not necessarily avid fans of the company, but to shed light on all of the information and data available so that consumers, investors, and policymakers have as much information as possible at their disposal when they are making decisions that affect their lives, their families, and their constituents.

“Zillow is a great starting point for information, but it’s a starting point,” she emphasized. “For example, the human element is really important. I think pretty much everyone, homebuyers and investors alike, should be talking to their local agents. Not just talking about home values and how fast they can buy or sell, but also about what winning strategies might be working in a specific area.”

She added, “In today’s market, it is so hard to buy a home. Never before have we seen such high levels of demand being met by such low levels of supply in the housing market. That is meaningful for everyone involved in a real estate transaction because if you do not do your due diligence, if you fail to conduct enough research into your market and your purchase, you will leave money on the table.

“We are seeing so many problems in markets where people cannot make the math work anymore. They cannot ‘catch the train’ and become a homeowner because home values are just racing away from them. The values are moving upward too fast, and incomes aren’t keeping up.”

Opportunities in Inefficiency

Due to the rate at which many desirable housing markets are appreciating, Gudell said that real estate investors, whose primary strategies tend to rely heavily on the ability to buy at a discount, add value, or sell at a premium, will find the most opportunity in 2018 in markets with what she labeled “inefficiencies” in their housing markets.

These inefficiencies create gaps in the buying and selling process, and can include inventory shortages, flawed appraisals, a lack of construction materials and labor, difficulties with financing, and homes that will require a great deal of work to make them livable. In any of these instances, Gudell said, investors may find an opportunity to place themselves in the gap thanks to specialized knowledge, unique connections, or access to resources that others simply lack.

“There are a lot of markets that are unaffordable because of limited inventory, so an investor who can access or create inventory is filling a need, addressing an in efficiency in the market,” she said. “Obviously, in many markets with limited inventory they would be building more homes if they had cheaper access to labor and lumber or if they could get lower land prices. Sometimes the issue is also that the regulations around new construction may be expensive and not necessarily defined. These things can make a market function less smoothly and create an inefficiency that an investor can fill.”

Gudell cited Detroit, Michigan, as one such market. According to the New York Times, Bank of America and JP Morgan Chase, both of which can trace their roots back to Detroit and financing its legendary auto industry, made a total of 24 home mortgage loans in Detroit in 2016. Quicken Loans, known for founder Dan Gilbert’s passionate support of the Motor City, made 170, more than any other lender. Detroit has a population of about 637,000.

Analysts blame the massive lack of traditional mortgage lending in the city on low home values, cash-poor buyers, and difficulty getting loans to fix up properties to habitable standards.

“In Detroit, the appraisal process is not working. It’s hard enough to get the bank to cover the initial purchasing price which, realistically, is often probably not more than $30,000 for many homes, and then you need a construction loan for $200,000 on top of that to make the home livable,” Gudell explained. “That is the kind of friction the homebuyers need to be working their way through or around by getting all of the information that they can about a market, including how to get a loan creatively or conventionally, and that real estate investors need to be watching closely so that they can create solutions to these problems and build their businesses.”

She concluded, “I always want more information and better access to information and data. We’re making big strides toward this all the time. Zillow is just one group pushing in that direction.

In so many markets, you just will not be successful if you are not fully informed, and you will also leave money on the table.”

Refusing to Gloss

Gudell noted that in addition to looking for opportunities and inefficiencies, real estate investors must also read the fine print, not just look at the big picture. “Affordability is a really big topic these days for homeowners and investors, and you need to understand not just how affordability differs from one city to another, but also from one age group to another, one demographic or ethnicity to another, one income group to another,” she said. “If you don’t understand these distinctions, you cannot offer the right products, services, or advice to your target market.”

Gudell acknowledged affordability is a burgeoning problem, and she predicted that things might not “change considerably” in 2018 as far as this specific issue is concerned. However, she added, affordability is particularly troubling in the 2018 housing market because of the imbalance between steeply rising home values and lackluster income growth.

“The affordability crisis, as some people are calling it, is easy to look past because when you look at the median or the average numbers for the national market, it is easy to gloss over,” she said. “It’s when you break the issue down into subgroups that you can see who is really suffering and which sectors are likely to shift soon, either losing or gaining value.”

Sometimes, the sector that is suffering is not necessarily the one at the lowest end of the price range. For example, in Miami, Florida, Gudell warned that the upper echelons of the market could be on unsteady ground. “The high end of the market in Miami is seeing a little bit of cooling in the condo market,” she observed, noting that many of these units sit vacant because they were purchased by foreign investors. “It’s possible that you might see a bubble forming (or bursting) in that kind of situation,” she said, emphasizing, “In general, Miami is not in a bubble.”

Making the Most of the Data You’ve Got

When Think Realty Magazine first interviewed Gudell at the very end of 2016 for a story featuring “women to watch” in real estate, she told us that she was particularly excited about a new type of research going on at Zillow. “We’re trying to really go beyond the traditional housing metrics that are covered all over the real estate space and tracking trends of jobs, employment, everything that touches the home-buying process for the consumer,” she said at that time. Since then, she has remained dedicated to her mission of more information and better access to it, as has her team of economists and analysts.

“The reason that we’re doing this and the reason that I’m excited about it is that our mission is always to empower the consumer to make better decisions. If you understand the setbacks and opportunities that people buying or renting houses, really doing anything related to housing, are dealing with, then you get a much better view of the overall economy and where the housing market is going,” she said nearly a year later.

For example, shortly before that first interview, then-chief economist at Zillow and Gudell’s mentor, Stan Humphries, observed that for real estate investors, the key to success lies largely in buyer, seller, and renter priorities. “For more than a third of renters, finding a place that will allow their pets is…often cited as more important than a shorter commute,” he wrote in a Zillow Research Group report.

Humphries added another note: “Buyers aren’t replacing the expertise of real estate agents with online research [as many real estate analysts predicted would happen with increased web access], but they are doing a tremendous amount of online research before contacting an agent. Those who start their home searches online are actually more likely to use an agent than other buyers.”

Shortly after that report was published, Gudell became Zillow’s chief economist and carried on Humphries’ and Zillow’s goals revolving around “turning on the lights” to enable every participant in the housing market to make good decisions for their unique housing needs and situations.

“If you’re going to buy a home and cross your fingers because you’re in a hot market and you waived all your inspections, even that decision should have been made after evaluating all the information and data you could get on how that might play out for you,” Gudell said. She added that this particular practice is not only risky for owner-occupant buyers, but that it leads to a dangerous behavior: viewing your own home as an investment (see sidebar on p. 25).

“I don’t know that I would go so far as to call it a mistake, but it is definitely risky to get caught up in thinking of your home as an investment,” she said. “Of course, as a homeowner, your home has the nice feature of being kind of like a piggy bank. You pay your mortgage and you save money along the way. You probably gain some value, although I would say that it is probably the land value versus the structural value that you’re gaining in. Once you start to think of your home as an investment, though, your behavior changes a lot. I think you make decisions you might end up regretting, maybe trying to time the market, which often does not work out so well.”

Gudell emphasized that for most homeowners, the decision to treat their home like an investment property is not one that is usually made in light of all the available information about their property. Investors, she said, are different. “Most investors have more experience in buying and selling homes. They often have more funds and better information about the market, which gives them a leg up. Not to mention, often investors can afford to buy a property with all cash.” All of these distinctions between investors and conventional homeowners give investors a unique edge on the market that most homeowners lack.

Real estate investors who already routinely rely heavily on data, information, trends, and news coverage to monitor markets and investments, may fare better in treating their own home as an investment property than the average owner-occupant. However, even investors have a blind spot, Gudell warned.

“We have found that investors and traditional home buyers tend to assume that appreciation is a given in a market simply because the numbers indicate that it has been happening. This holds true in a lot of cases, but especially in lower-end homes without a lot of distinguishing characteristics, the appreciation rate in those properties will not always be as fast as the market’s median and average values might appear to indicate, although currently the bottom end of the market is appreciating faster than the top,” she said.

“If you are a homeowner putting all your money in that type of investment without the information specific to your type of home, it could be a whole lot riskier than investing in more traditional assets,” she said. “Of course, if you are a savvy investor who does your research and your due diligence, you can invest in just about any sector of the market and do quite well for yourself,” she added.

What’s Coming in 2018

As far as the coming year goes, Gudell believes that U.S. housing is going to continue to be what she dubbed simply, “interesting.”

“I don’t think that the market is going to change considerably in the next 12 months, unfortunately,” she explained. “I expect we’ll continue to deal with supply shortages, but it is going to get especially interesting for investors because we are living in a world where, at this point, it is very hard for a lot of people to buy a home. As a result, they are turning to single-family rentals to get a step closer to that American Dream of homeownership.”

Gudell noted that an increasing share of the housing inventory is made up of single-family rental homes, something that has been happening in an increasingly pronounced fashion since the housing crash.

“That is a huge market, and it is going to remain so. I don’t foresee any really big changes there,” she said. “We’re already not able to supply enough homes for the entire population at this point.”

When asked if she believes that the much-touted “American Dream” is dying or dead, however, Gudell responded with a resounding negative. “It’s alive and well. Ask Millennials, the biggest home-buying generation we have right now. They are more positive on homeownership than any other generation. They are just having a hard time getting there and they’re doing so differently because they are buying their first home much later on in life than other than other generations have,” she explained.

“I’m just glad that I’m part of empowering them to be able to do it,” she concluded. “For anyone buying real estate, the more information you have, the more powerful your position will be.”


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