Ivy Zelman called the top of the 2000s housing market and the start of its postcrisis recovery.While home prices are climbing today, she says they’ll fall sooner than many experts think.Zelman told Insider why a flood of Wall Street money left the housing market vulnerable.For people just starting to think about selling their home, this must seem like the perfect market: The combination of enormous demand stirred up by the coronavirus pandemic, low mortgage rates, and little new construction is hard to resist.
None of that is good, of course, if you’re a buyer, but at least someone is happy.And Wall Street even thinks it has identified a recipe for a long-lasting rally in home prices, which is contributing to its newfound interest in buying houses .
One person disagreeing with all that wouldn’t be a big deal — if that person weren’t Ivy Zelman.
In a business where one perfectly timed market call can make a career and two can make a legend, Zelman sits squarely in the second category.She called the top of the housing market in the mid-2000s, some two years before a historic bubble burst, and famously grilled the CEO of Toll Brothers about an overly optimistic forecast in 2006 when she worked at Credit Suisse.
Then, at own her housing research, advisory, and data-analytics firm, Zelman & Associates, she identified the moment in early 2012 when the market finally started to recover after years in the doldrums.
Today, she says the seller’s market is living on borrowed time.
One reason, in her view, is that people are underestimating the enormous amount of construction being planned.In November, Zelman estimated that national demand for single-family homes sat at about 900,000 units a year, but 1.1 million units were planned — a difference of about 20%.
At the same time, institutional investors have already announced plans to spend $75 billion in build-to-rent homes.
If that happens, it will only add to the construction already going on .
“If we actually build all of the production that’s coming, and the land grab that’s at inflated prices that we’re seeing, we could have a pretty sizeable correction because we don’t think there’s enough bodies to fill up all these incremental production units,” she told Insider in an exclusive interview in November.
Roughly half of the new homes under construction today are being built on spec, meaning there is no buyer lined up, she said, adding that there was far more speculation today than there was before the COVID-19 pandemic.
That’s a vulnerability, and Zelman says a lot of building and buying are being driven by “non-primary” buyers, meaning Wall Street investors and people who are buying homes to renovate and sell them, as opposed to people who want to buy a house and live in it.
Zillow’s iBuying disaster didn’t create this situation , she says, but the company was one housing-market investor among many, and its failure illustrates how things could go wrong when the market turns.
“Just like they inflated on the way up, they accelerate the pressure on the way down,” she said of the strategy, which had Zillow paying high prices on homes and then frequently selling them at a loss.”If you can’t make money in a seller’s market, it’s a little comical.”
But as strong as demand might look now, Zelman argues that over time it will prove to be weaker than it appears.
She has numerous reasons backing up this thesis: The US population is aging, and older people are far less likely to move; ultralow mortgage rates have set off a refinancing boom that will push people to stay where they are; and fewer people are marrying and having children, which are two of the most common reasons for buying a home.
With all of those trends eroding demand, she says, investors in the housing market will cut back on their building plans and sell out of the market, contributing to a downturn in prices.
“We’ve seen this movie before,” she said.
“We’ve seen it happen.The question is, how fast is it?”
There isn’t a glut of subprime mortgages and related securities today, and Zelman isn’t predicting anything as catastrophic as the housing-market implosion 15 years ago.
But she says markets with a lot of development planned, a lot of investment-backed buying, and high expectations are vulnerable.
The most at-risk markets are the ones that have been the hottest recently, like Phoenix, Atlanta, and the Carolinas as well as Dallas, Houston, and Austin, Texas.One of the most important things to monitor is the incentives that builders and sellers offer buyers.As markets get weaker, those incentives get bigger.
Cities with less building, such as Cleveland, Milwaukee, or Madison, Wisconsin, face less risk from those factors, in her estimation.
On the other hand, an increase in mortgage rates would shake up the market nationally.
“One market that’s a poster child and maybe a harbinger of things to come is Boise,” she said.
“We’re hearing that things have really slowed there and there’s a significant increase in incentives and major price resistance.”.