Five Questions with Svenja Gudell, director of economic research, Zillow

Date: June 25, 2020

Zillow is the leading digital marketplace for real estate sales and rentals. Zillow’s living database of more than 110 million U.S. homes—including homes for sale, homes for rent and homes not currently on the market—provides consumers with market information and connects them with local professionals. Through its website, mobile apps and publications, Zillow serves the full life cycle of owning and living in a home: buying, selling, renting, financing, remodeling and more.

Svenja Gudell joined Zillow in 2011 and leads its economic research group, a team that studies trends in the housing market, including home values, foreclosure research and forecasting. Gudell also collaborates on research with other organizations and academics. Prior to joining Zillow, she completed a Ph.D. in finance from the University of Rochester. Before pursuing her Ph.D., she worked for Analysis Group in Boston and at the Federal Reserve Bank of New York.

What inspired Zillow to develop the new Zillow Mortgage Access Index (ZMAI)?

We’ve been hearing anecdotally for several years now how difficult it is to get a mortgage, but we hadn’t seen any hard data to back up those assertions. We created the Zillow Mortgage Access Index in order to gauge just how much more difficult it is (or isn’t) to get a mortgage today compared to years past.

What we found helped refute some of the stories we’ve been hearing: Yes, mortgages are more difficult to get now than they were in the years immediately before the housing bubble. But compared to a few years ago, mortgages are much easier to get now, and conditions have been steadily improving.

There’s still likely some room for further improvement, but in reality, we have to be vigilant to make sure we don’t repeat the mistakes of the past, when access to mortgage credit was far too loose.

For whose use did you design the ZMAI, and who should be using it?

One of the unique features of the Zillow Mortgage Access Index is the ability to see how several different factors are changing and influencing mortgage credit over time. For example, consumers can see how the 10th percentile of credit scores (the lower bound) has eased, falling from more than 700 a few years ago to about 675 today.

For someone with borderline (but traditionally fairly strong) credit of around 680, it’s very useful to know that kind of credit score is more acceptable now than it was a few years back. Perhaps that will give them the confidence they need to talk to a lender and enter the market.

Since introducing the ZMAI in March of this year, you’ve published one update, based on data collected for the fourth quarter of 2014. That update reflected a slight dip in the index, indicating the first reduction in mortgage accessibility in two years. Your news release describes the decline as a “blip.” What makes you confident this is an anomaly and not the start of a downward trend?

The index, like the housing market in general, has shown consistent—if not always uniform—improvement since bottoming out during the depths of the recession in 2010. A small downward movement over one quarter does not change the overall trend we’ve been seeing.

I expect to see gradual improvement to continue throughout this year, particularly as lenders try to widen their business as refinance business continues to dry up. Lenders’ business models depend on writing loans, and I think there’s a lot of good business currently being left on the table because of artificially and unnecessarily strict lending standards.

Based on your activity in markets across the U.S., which cities, states or regions do you expect to see the biggest improvements in the housing-market recovery in the coming year?

Unlike during the housing recession, when all markets were generally moving in one direction—down—local market dynamics are really reasserting themselves in this market, proving the old adage that all real estate is local.

Some markets, particularly large, coastal California markets like Los Angeles and the Bay Area, remain incredibly hot, with rapid home value appreciation and rental appreciation. This is driven by healthy job growth in these areas, very strong demand and limited supply of homes for sale and rent.

Markets where it is traditionally easier to build new homes – places like Texas and parts of the Southwest and Southeast – will likely see less volatility in rents and home values, as new supply more easily keeps up with growing demand.

Is demand for rental homes shifting at all, relative to demand for home purchases? What does Zillow’s tracking of both sales and rental activity reveal about trends in American homeownership? Is demand for rental homes shifting at all, relative to demand for home purchases?

The homeownership rate continues to fall, now at its lowest level in decades, and I expect it to remain near its current levels for a while yet. During the recession, many households “doubled up” in order to save on housing costs—think of children moving back in with their parents, or of younger renters finding more roommates to split monthly costs. As the economy improves, these doubled-up households will strike out on their own, at first primarily as renters. Since 2005, almost all household growth has been driven by growth in renting households. So the rental market will remain hot.

Rental affordability, measured as the share of income spent each month on rent in a given area, is becoming a big issue. Rents have grown at roughly twice the pace of wages since 2000, and you don’t have to be an economist to see the problem there. Currently, the typical U.S. renter should expect to spend about 30 percent of their income on rent, up from about 25 percent historically. This is good news for landlords, but makes it difficult for their tenants to save for a down payment as more of their paycheck goes to paying the rent, instead of into savings accounts.

But even as renting a home gets increasingly unaffordable, buying a home is roughly as affordable as it’s ever been, thanks to historically low mortgage interest rates and home values that remain below their pre-recession peaks in most areas, which keeps monthly mortgage costs low. Currently, a home buyer should expect to pay about 15 percent of their income on a mortgage compared to about 22 percent historically. For buyers who can qualify for a loan, scrape together even a modest down payment and find a home in their price range, buying represents a terrific bargain compared to renting in most areas.