Risk of Downturn in US Residential Real Estate

Sunday November 14, 2021

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What Happens Next is a podcast where an expert is given just SIX minutes to present her argument. This is followed by a Q&A period for deeper engagement.

This week’s topic is the risk of a downturn in US residential real estate.

Our speaker today is Ivy Zelman. Ivy is a leading housing analyst, and she has won the coveted top ranked home building analyst award from Institutional Investor.

In 2007, Ivy started her own investment bank called Zelman Associates which combines equity research with capital markets and investment banking advice for the housing industry.
I first met Ivy when we worked together at Salomon Brothers during the 1990s where she was known as a rising star.

Prior to the financial crisis of 2008, Ivy correctly spotted that the US was headed for a housing debacle and she laid out the reasons in her published equity research. Needless to say, her arguments upset the housing industry management teams. But she kept to her views and was proven right.

Today, Ivy will explain why she has a contrarian view on the US residential real estate market. Ivy thinks that demand will prove illusory post Covid especially if interest rates trend towards more normal levels at a time when she expects a surge in housing supply.


Ivy Zelman

Topic: Why the Residential Real Estate Market in the US is likely heading for a downturn
Bio: CEO of Zelman Associates
Reading: Gimme Shelter: Hard Calls and Soft Skills from a Wall Street Trailblazer is here


Ivy Zelman
Hey, Larry. It’s great to be on your show. I’m excited for you and this new platform., A sobering moment for your audience because I am the contrarian once again on the U.S. housing market. As Mark Twain has stated, “While history does not repeat itself, it sure can rhyme at times.”

I’ll start with the demographics as demographics are really the foundation. And what’s concerning to me is over the past decade, the U.S. population has slowed to the second slowest on record this past decade at roughly 7.4%, just slightly above the 1930s population which was the slowest on record at 7.3%. And that’s really a function of plummeting birth rates as well as less immigration.

Secondly, when you look at households, households over the 10-year period just completed actually grew the slowest ever on record at 8.7%. And it’s not just in the blue states, it’s across the country. And a lot of that has to do with the combination of women delaying marriage and family formation and pursuing higher education. And when they do have children, a lot of them are one and done.

We also have multi-generational living where you’ve got where the boomers are known as the sandwich generation, where they have their adult parents moving back with them, and then they have their adult children that don’t leave.

And if you actually look at the number of 25 to 35-year-olds that are actually living at home, the numbers over the decade every year after initial first three years of the decade unwind from the great financial crisis has been going the wrong way, which I don’t think is fully appreciated. And so, we believe normalized demand currently for the entire market should be about 1.3 million, and for single family, 900,000, and where ours starts and what’s in the pipeline are already 20% above that. And for multifamily what’s in the pipeline is probably 10 to 12% above that.

The second reason is the amount of capital that’s chasing this asset class. It’s just gone bonkers. We’ve got institutional capital that’s raising funds. They’ve got to pay a return that they promised their investors, and they don’t want to go to office or retail or hospitality, so everybody’s going to residential. I like to say that the residential is the prettiest girl at the dance now, but even more specifically, the new asset class build for rent, it’s skyrocketing.

In fact, we did a deep dive report called focused on the build for rent space, and that shows that over the last 18 to 24 months just what’s been publicly announced, predominantly unlevered has been more than $60 billion of capital, but only going to predominantly the red states. So, everybody’s concentrated in the same market chasing this asset class, resulting in really robust inflation.

Land prices according to our proprietary land survey are up over 30% nationwide, and where the concentration of the capital is going is up more than double.

Affordability with home prices up on a national basis approaching 20% annualized plus what we have at lease rates running up double digits in many cities in the country, affordability is hitting a wall. We’re seeing buyer fatigue in the market, but the real risk to the market is going to be mobility will be arrested if mortgage rates were to go to as little as 4%. 4% mortgage rates will shut down this housing market.

And I say that because, with the exception of the millionaires and billionaires, probably some of you on the phone that can pick up and leave New York City or the Tri-State area and go to Miami, the general population is not uprooting their family. And if they are locked in, if they’re one of the roughly 70% of Americans that were smart enough that actually refinanced their mortgage, think about the number of people that will be disincentivized to move.

And that will be the backlash of the Fed, is the Fed’s horrible policy of keeping rates artificially low too long through purchases of MBS. And when they start tapering, you’ve got this perfect storm brewing, Larry, where you’ve got risk of rising rates, significant surge of pipeline of start activity in the face of higher prices across the board while demand, we believe is going to moderate. So, I’ll stop there.

Q&A with Ivy Zelman

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