Strong housing demand a mirage, says analyst who called previous crash

Zelman, who called the market top in 2005, said there is no supply deficit and home prices could fall

Housing Analyst Ivy Zelman (, iStock)
Housing Analyst Ivy Zelman (, iStock)

Everyone seems to be betting the house on a new home these days. Multibillion-dollar private equity firms. Joe Schmo house-flippers. Even savvy tech firms.

Everyone except Ivy Zelman, that is. The analyst who called the top of the housing market in 2005 is once again waving a red flag. It’s beyond contrarian: She’s pretty much in a category of one.

“The perception that housing is drastically undersupplied and that a strong demographic picture lies ahead is creating a false sense of security,’’ according to a report by Zelman’s firm entitled “Cradle to Grave.’’ “By our math, both single-family and multi-family production are already ahead of normalized demand and estimates of a housing deficit are grossly exaggerated.’’

Homebuilders, the National Association of Realtors and Freddie Mac are pushing a now-familiar narrative that soaring demand for scarce housing is driving up prices. By NAR’s estimate, the U.S. has about 6 million fewer homes than people want.

The problem is on the other side of the equation, says Zelman — it’s impossible to determine real demand because of all the new players. Private-equity firms are acquiring, and sometimes building, properties as rental homes. iBuyers like Zillow and Opendoor use algorithm-driven purchases to quickly buy homes, although Zillow’s flawed methodology led it to overpay in Phoenix by as much as $65,000.

“No, we don’t have a deficit,” Zelman, who founded Zelman & Associates, said in an interview with The Real Deal. “We have a pipeline of activity that actually would put us in an overbuilt situation relative to normalized demand.”

Granted, 2021’s housing landscape differs in some significant ways from 15 years ago. Mortgage underwriting is solid, making it unlikely that a mortgage-backed securities implosion is coming. Yet the oversupply of homes, combined with an aging population and rising mortgage rates, could cause prices to drop in certain markets, leaving home builders stuck with unsold inventory.

Zelman’s bearish take has new legs in the wake of Zillow’s decision to exit iBuying after incurring significant losses. The company is seeking almost $2.8 billion from the 7,000 homes it bought and is firing a quarter of its workers, saying it’s just too hard to predict home prices. To Zelman, Zillow’s struggles are a harbinger of future woes, especially in places where investors — rather than 2.4-child families — have driven demand such as Phoenix and Boise.

“All this price war and bidding, how much is it being inflated by iBuyers basically bidding against the teacher, the fireman, the policeman?” said Zelman, who is promoting her new book, “Gimme Shelter: Hard Calls + Soft Skills From A Wall Street Trailblazer.’’ Phoenix is among the riskiest markets, particularly for builders, because of all the buying by investors, she said, also citing Austin, Dallas and Houston.

Zelman’s data, and her conclusions, differ substantially from other housing market institutions.

The Mortgage Bankers Association says it expects to see record mortgage purchase originations over the next two years. “Robust homebuyer demand from millennial households, households seeking more space, and still-low mortgage rates are favorable tailwinds for the housing market in 2022,” the MBA said.

Or take the National Association of Realtors.

“The scale of underbuilding and the existing demand-supply gap is enormous,” the group said in June. That means “a major national commitment to build more housing of all types.”

Lennar, one of the nation’s biggest home builders, echoes that line.

“Demand has been consistently strong, while the supply of new and existing homes remains limited,” Lennar Executive Chairman Stuart Miller said on the company’s most recent earnings call. “Short supply is likely to remain for some time to come.”

Cradle to Grave

Before most every financial crash, a doomsday prognosticator emerges.

Prior to the Great Financial Crisis, Nouriel Roubini, also known as “Dr. Doom,” warned at an International Monetary Fund event in 2006 that a U.S. housing crisis could lead to a worldwide recession. Then there’s Meredith Whitney, an analyst dubbed the “Wall Street Oracle,” who predicted in October 2008 that Citibank was likely heading towards collapse. It didn’t, but Bear Stearns and Lehman Brothers did, and Merrill Lynch got sold.

Zelman, whose firm was acquired by Walker & Dunlop this year, has long used earnings calls to press bullish homebuilders on their rosy expectations.

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“Which Kool-aid are you drinking?” Zelman, then at Credit Suisse, asked Toll Brothers CEO Bob Toll on the fourth quarter 2006 conference call after he touted pending sales.

Zelman’s thesis bears some similarities to her commentary in 2006. Mainly, homebuilders aren’t realistic on forecasting supply and demand. Too many developments coming down the pipeline peddling homes at unaffordable prices.

Her firm’s report makes the case that U.S. population and household growth will ultimately determine housing demand.

“Population growth — the crucial underpinning of future housing demand — is on a troubled trajectory,” the report said.

The U.S. population has grown just 7.4 percent growth in the past decade, the second-slowest rate on record, the report says. Household growth in the country was the slowest in history at 8.7 percent. Birth rates are declining. And Zelman estimated that more 20- to 39-year-olds lived with their parents or grandparents in 2020 than in 2010.

She brings up the example of Japan, where the population declined significantly and housing production dropped by as much as 70 percent. A similar scenario could play out in the U.S. if the population keeps dwindling.

As of August, single-family starts in the U.S. totaled about 1.15 million from the prior year. Zelman projects that actual or “normalized” demand for these homes is 21 percent below that.

Adding to the supply issue is the expansion of the “build-to rent” home communities.

By Zelman’s estimates, the announced capital heading into the sector is about $75 billion. Build-to rent firms such as Phoenix-based NexMetro Communities have been betting that while Americans like living in homes, they either can’t afford to buy one or prefer to avoid the work of being a homeowner.

Such firms are competing for the same land as for-sale homebuilders. As a result, land prices have skyrocketed, eroding profit margins, she said.

“In order to pencil returns, you have to assume that demand is sustainable and that you have to keep hitting your volume levels that you have been hitting,” said Zelman.

Prices can only rise so far before potential homeowners simply can’t come up with the cash.

Zelman said she recently spoke to a homebuilder in Boise, Idaho who is producing 2,000 homes a year. The builder said home prices are reaching unsustainable levels.

“They said it was like a light switch, like the market just literally turned off,” said Zelman.

Combine this with the near-certainty of rising mortgage rates and homeownership becomes even more unaffordable. Most homeowners are locked in at a rate below 4 percent because of record low interest rates by the Federal Reserve and billions of dollars in purchases of mortgage backed securities.

“Rates matter,” said Zelman. “We think the market has been juiced.”

Only certain markets are at serious risk, Phoenix among them. Many of the city’s new home starts are being constructed by build-for-rent builders. It’s also a place loaded with “non primary buyers” such as private investors or tech companies.

Homebuilders say their biggest issue is not demand, but supply chain issues, which have slowed construction and raised costs.

Zelman’s view is supply chain disruptions have actually kept the market from overheating.

“The supply chain bottleneck is at least acting like a regulator from the industry blowing itself up,” said Zelman.