Housing Market - Correction or Crash? With Ivy Zelman, Executive Vice President and
Co-Founder of Zelman & Associates, a Walker & Dunlop Company
Willy Walker: Good afternoon, and welcome to another Walker Webcast. It's my great pleasure to have my colleague and friend Ivy Zelman join me today for what always gets a lot of views. You are a big draw as it relates to people who want to hear about the housing market. That's nothing new. It's been the story since you and I first met. And I came to your housing conference years ago. But it's really a joy to have you on today and to dive into some of the data that you and your colleagues at Zelman do such an amazing job pulling together on the housing market.
I want to say at the top that I watched a webinar that you and your colleagues did based on a lot of your current research. I just want to give a quick shout-out to Ryan McKeveny, Alan Ratner, Mark Franceski, Jesse Lederman, and Adam Baumgarten for all of the great work that they do, and I would highly recommend them to anyone. Ivy and I hopefully will give you a synopsis of all that. But if you really want the data and you really want the view, sign up for what Zelman puts out in such a fantastic form. And thank you to all those wonderful analysts who are on the Zelman team for all the great work that they do.
Ivy let's start here. Having listened to that and seen all the data, I sit there and go, there's got to be a spot in here where opportunity exists, but most of the data coming back says with rates where they are, there's slow growth everywhere. There's a slow growth kind of single family. There's slow growth in multifamily. There are inventories building on single. There's too much inventory on multi. Talk for a moment about just kind of your general sentiment right now. I think one of the most concerning things I saw in that whole presentation was one of the slides that compared the housing market back to the mid-80s, in the mid-90s. And I was like, “How about we get to some of the later parts of those decades rather than sitting in the middle part.” But give a general sense of how you feel about the housing market today.
Ivy Zelman: First, thank you very much. And I appreciate the very generous intro. And yes, all of my analysts are awesome. So if anyone's interested, please sign up with us, and you'll get the benefit of all their hard work and intelligence on the housing market. So thanks again.
So our view right now is that the housing market, in some respects, is really in a slow grind. And I think that the new construction for single-family has been super resilient despite rates having backed up so much. But now we're starting to see a little bit more challenges as it relates to sustaining their sales pace. And there are more incentives coming into the market. Affordability concerns are being raised more often than we saw earlier this year when the market was still quite strong despite those rates being so much higher. In the existing home market, we're now seeing inventories begin to rise, as you mentioned, which is a good thing for the transaction side of the market because everyone recognizes if you've been looking for a home, how difficult it is to find a home in a good location. We're now seeing the market loosen up a bit, but that likely comes with price deceleration as you have more competition, especially in markets where new home production is most prevalent.
In multifamily as you know we've been cautious for quite some time, but it's actually pretty interesting today as we're seeing that significant supply you mentioned that will get completed. But the drop off in starts is promising because that would likely lead, in our view, to some time, possibly late ‘25 or early ‘26, for a real need for more supply in that multi-family shelter category, especially when you look at the households being formed are going to be Gen Z's who need more likely multifamily. When you think about our ecosystem, and we think about all aspects of shelter while we're seeing challenges in each silo, I think there are also opportunities.
Willy Walker: Let's start with affordability. Ivy, your team has a really interesting graph that talks about affordability. We're at 20% above trend as it relates to home affordability. And if you go back and look at the slide as it relates to where we were from the great financial crisis to pre-pandemic, we were actually at 75% of average. So we were 25% below average as it relates to the cost of single-family housing, just because of where mortgage rates were and being so low. Now we're well above that. It seems like the markets in this push-pull to, if you will, accept or get to a place where that household affordability number gets to something that people feel is normalized. There was a data point in there that was talking about how sensitive the single-family market is to rates and where when you're at a six, five, or above mortgage rate on a 30-year fixed, that puts significant downward pressure on overall purchase activity. But when you pick up ten basis points or 20 basis points and go down to 640 or 630, that really adds a lot to it. Talk for a moment about, if we do get cuts here, can we see a resurgence in the cost of homes coming down and actually the purchase market picking up significantly?
Ivy Zelman: I think significantly might be a stretch because the question is, why are rates coming down if it's a soft landing and the job market continues to be resilient albeit it not running as hot as it was but call it 200,000 jobs or whatever. And wage inflation is still 4+, 5%. But when I think about where affordability is today and the sensitivity to rates, it's only in the context that it is a very stable economy. If the economy is weakening, and that's why rates are coming down -- different story. But today, the lock-in effect, as we all know, with the free money that everyone was accessing during Covid, what we have is today, more than roughly 80% of homeowners that actually have a mortgage are locked in below five. So where the sensitivity is, we get closer to that, and it was over 90%. But with all the originations that we've been doing that are north of 6.5-7%, that number has been coming down. But that lock-in effect has really disincentivized people to move. So what would be the right number to get them to move is really what people talk about. And people think roughly 5-5.5% could be the magic number. One other thing to contemplate is that we have an inverted yield curve as a result of the inverted yield curve the spreads that typically we see the ten year versus the 30-year mortgage rate is about 100 basis points wider than normal. So there is optimism that if you took that 100 basis points and you compressed it to normal, mortgage rates would be five and a half right now. And why they remain wide. If we get a deep inversion, they likely compress. And there's some optimism that we don't even need the Fed to cut if we get a likely Fed cut, we'll get to see a D inversion. If that's the right term. I do think, though, where you mentioned affordability, it's incredibly challenging for today's prospective buyers not only with the monthly payment with rates rising as much as they have, but home prices have continued to rise north of 5-6% and even wage growth. Although trying to keep up, we have other factors like homeowners’ insurance which is soaring, and other incremental costs that are also weighing in on consumers' ability to buy. So I think it's tough for people. And one of the things we saw during this higher rate environment is record cash purchases. So there's more challenge, as you'd expect, at the lower end of the price spectrum. And the more affluent, higher-end is still doing relatively well. But there are a lot of sellers that we call that have aspirational pricing. They want the peak pricing from Covid. So there are holdouts. But I do think that the spectrum of where the healthiness of the market is the strongest is really at the high end.
Willy Walker: So a couple of things on that. There's so much in here and so much data to talk about. Your team did an analysis of single-family rental versus home ownership in a number of MSAs across the country and in the same school district, specifically to try and compare SFR to home ownership. And I believe it was last year's numbers. The delta across those MSAs was about a 9% disparity or difference of the cost of rental versus ownership. Am I right on that?
Ivy Zelman: Actually, you're 100% correct, but it was build for rent, so distinguishing an existing home would not have been included in that analysis. It was a brand new build for rent home.
Willy Walker: Okay. And you see that delta expanding or shrinking as it relates to the cost of renting a home versus owning a home given those adders, if you will, as it relates to insurance cost and mortgage cost on the ownership side. Would that 9% expand out in your thinking or shrink?
Ivy Zelman: I think that it probably expands outward a bit and makes it more favorable for the build for rent shelter only because of the homeowner's insurance and some of the other costs associated whether utilities, property taxes, a lot of those are seeing continued inflation. But I would also note that single-family rental rates are not going up at the same rate. And home prices in the new construction area have decelerated. And we're estimating they're only going to increase the net of incentives by about 2%. So with the exception of the other costs and thinking about build-for-rent prices, at least rates are not going to go up. It probably becomes marginally more favorable for build-for-rent, but I don't think that is much more significant just because we're putting a lid on new home price acceleration.
Willy Walker: Are you concerned at all as it relates to the new supply on the BFR/SFR side?
Ivy Zelman: It's not significant enough. I think that there are certain pockets in the country where it's more prevalent, markets like Atlanta and Phoenix and Charlotte and Dallas, there might be some pockets where it's more competitive, and therefore rent rates will probably remain somewhat stable. But I don't see that as a bigger problem. Many people like to look at the comparison from apartment rentals to single-family purchases. And to put that in context, we don't necessarily think that's the best analysis just because it's a bit of apples and oranges. But just to stress the difference in affordability, it's nearly 30% better to rent an apartment today than to purchase a home. So the widening to that will create friction in the single-family market, but not as much friction as you get from the single-family rental market assuming lease rates come down further.
Willy Walker: And one of the slides that jumped out at me Ivy, as you're talking about differences between the rental and homeownership was your tracking on rent growth. And it's an amazing slide that shows where the CPI is tracking rent growth. And it's this red line that's way way up. And then, you all track seven other indicators of rental growth. And they're all dramatically below them. And you see this big lag in where CPI rent growth goes versus where all of the other indicators are. I don't want to dive too much into the rabbit hole as it relates to why CPI is still giving us these false prints on rental, but I thought that that data point if you took that slide and like sent it to Jerome Powell and read the data you're pulling out on your rent growth is way off of what we're pulling out of actual market sources is really quite something.
Ivy Zelman: It's frustrating to many market participants, given that the measure that they're really focused on is the owner rent equivalent. So OER is really the basis of how they're determining CPI, which is 40% of shelter as opposed to actual rents. They're sampling households etc.. But it's not the same data that we have, which is actual rents. So we're looking at not only new move-in rent rates but blended rent rates that are showing that the deceleration really overall rent growth has normalized for the most part, and we don't expect much more pressure. In fact, the spring selling season in the last quarter especially showed that rents were actually stable to moving back up a little bit, which we think might be temporary just because supply that still needs to be delivered could pressure rents in the back half of ‘24. But the CPI is, no question, very much lagging. And I think Jerome Powell knows that. So I don't know if there's a lot of OER that people say are people don't move a lot. So their rents don't change very often. So you have to take that into consideration when turnover is pretty modest. But I agree with you. It's pretty startling.
Willy Walker: I will say I was at a real estate roundtable dinner two weeks ago in D.C., and I raised the OER issue with Senator Schumer in front of everybody at the dinner and basically walked through OER how it's calculated, and why it is a false data point. A bunch of people walked up to me after dinner, and they said, “Couldn't believe that Schumer had no idea about OER.” And he said, “Don't assume too much about how in the weeds people in Washington are.” And that's obviously that sounds a slight against Senator Schumer. But the bottom line was he was very interested in it and really wanted to talk to the head of the Fed about it. So I sent a letter across to him.
Let's keep going here for a moment, though, Ivy, as it relates to rates because we're around it on the CPI print. Yours and my friend Mark Zandi was on CNBC yesterday morning, and Mark's commentary looks like on Thursday, we probably get numbers that are in line with where the Fed would like to go. And therefore, they set up in their July meeting for their first cut in September. Mark made it all sound as if this was all setup. This will play into it. Plenty of people who say, “No, the data isn't going to come in line.” But if you were to look forward to Thursday and what you think comes out there and then how that plays into Fed policy, are you on two rate cuts, one September, maybe one November as it relates to 2024? And then we'll talk about how that plays into the numbers that your team is projected for ‘25 and ‘26 as it relates to starts, mortgage rates, and everything else.
Ivy Zelman: Our read on inflation in the CPI, 40% is all we forecast. So we're looking at still north of 5% year-over-year rent growth in the CPI. So that may not be enough to offset whatever else the components that go into the basket that comprise the CPI. But from what we're seeing, the deceleration is not happening that fast, and we expect it to be a bit sticky. So if Mark's right, it might not likely be from the shelter that it's going to show up. But if we do get two rate cuts, the question is will that help to deinvert the curve? And does the long end stay somewhat sticky? And that's where you look at the forward yield curve and what's being priced in. And it does have mortgage rates coming down, but not as much. And I think that was before the employment numbers that came out last week. That gave more optimism for a July cut. So I think the forward yield curve will probably see even a bigger reduction in what rates would likely be in ‘25 and ‘26 as a result of that cut coming to fruition. So we don't forecast ourselves. But it makes sense to us that rates would be lower on the long end, but not that much lower because then you think about where the yield curve is on the long end. It's already pricing in the Fed actions that need to come to fruition to put us back to a more normalized yield curve.
Willy Walker: Yeah, you're spot on. And it's one of these things that has confounded me as it relates to people thinking that we're going to get rate cuts, and that's going to impact the long bond. Kind of in lockstep with short-term rates and I continue to come back and say it might bring them down a little bit, but the concept that, let's say hypothetically, they do 225% cuts, and we go from a 525 to a 475 Fed funds rate. The concept that you're going to take that out of the ten years on a basis-to-basis point doesn't make sense to me yet. Many people in both the single family as well as in the commercial side have sat there and said, “Oh no, we're going to have this big rally in the long bond. I'm interested.” You're, if you will, a little bit more in my camp, which is just you might see a little bit of a rally on the long bond, but it's not going to go, not even close to a basis point much less. What would be your thought if we get down to a 4.7 Fed funds rate by the end of the year? Do you think the ten-year gets below four?
Ivy Zelman: It could be around four. It might test like three and three-quarters likely at the most benefit, but I don't really see based on what we're looking at for long-term GDP growth and where in fact, the short end winds up with inflation to 3%. Your curve has to be normalized; you have to have the long end higher than the short end. So will we get a temporary pullback in the ten-year yield possibly. But I think it's going to stay above four eventually. And therefore the real benefit to the housing market would be the compression of that spread that we see. The 30-year fixed mortgage rate is currently hovering 100 basis points higher than the 10-year yield. And that is at least the numbers from the mortgage guys that we talked to suggest that should happen if we deinvert the curve of that relationship. But at the same time, why is it the compression, or why are there spreads wide? Number one, banks and the Fed aren’t buying mortgage-backed securities. So there's less demand, which is one reason we see the spreads are wider and then the risk of prepayment speeds accelerating if rates, in fact, do come down. So that's another reason why spreads are wider. And third, was the risk of default. So maybe default starts to become less of a risk. But those are some of the reasons why spreads are wider than normal. So I'm with you. I do not count on the long end of the curve bailing out. Whoever at this point counts on it as a way to see their business either pick up and accelerate or see better activity. I would not count on it.
Willy Walker: Am I right that on single-family mortgages, average spreads right now are at 260, and the historic average has been about 170? So there are about 90 basis points of tightening that could happen if you got back to a more normalized spread environment.
Ivy Zelman: Yeah, that's about right. I said 100. But yeah, that's about right.
Willy Walker: You talked about the cash purchase market a moment ago Ivy, and a couple of things on that, one some really interesting data from your team as it relates to the number of homes being sold over $1 million. Talk about that growth of where we were pre-pandemic to a year ago to today as it relates to total inventory being sold at over $1 million purchase price.
Ivy Zelman: It's been a rocket ship. We've seen a tremendous spike in homes purchased that are valued at over $1 million. And it makes sense, given the fact that we have had so much home price appreciation. I can tell you a home in Naples, Florida, that might have sold for $500,000 is now North of $1 million, so a lot of homes have doubled in value and even tripled in value in certain coastal markets. So there's no question that the inflation at the high end has just surpassed any expectations we would have had. So it's more than doubled, if not in some cases, tripled.
Willy Walker: And does that make you? I know I'm not going to try and get you to make commentary on specific stocks that you all cover and rate, but the Toll Brothers who are building to that price point, does that trend, and I think the numbers were that 3% of sales in 2019 were for homes over $1 million. It was 7% last year, and it's 9% year to date in 2024. So as far as total inventory, there's just been this huge growth in that. Do you think that the market can sustain that type of price appreciation so that a Toll Brothers, who's building at that higher price point is going to be selling into a really strong market? Or do you think that in the homebuilders they've got to reset and come down to an average purchase price that is below that level?
Ivy Zelman: No, I think Toll, by the way, which is one of our top picks, we're actually hosting Doug Yearley on Wednesday for a fireside chat, but we think they're very well positioned. And while Toll might be the only builder that's really geared to building a million-plus dollar homes in terms of their semi-custom homes, think about their market share. It's negligible. And today's buyer wants new. They prefer new. A lot of the stock today in the United States is very dated. The average stock is north of 50 years old. And we're looking at the Northeast and Midwest north of that. So when you have this old, dated product versus you want a new home Toll Brothers offers you that alternative if it's such a small number on a relative basis. I think they have plenty of room to continue to offer and see strong growth in the markets that they're serving.
Willy Walker: So you're talking about market share. And one of the interesting data points I saw was that the market share of the public traded homebuilders has grown dramatically. They continue to gain a share versus the private builders. A, why is that? And B, if you can give people a sense of how much their share has grown, is it that they have a pricing advantage on buying raw materials, or is it that they've swooped up and bought all the land, and, therefore, the entitlement process is behind them? What's made it so the public has gained more market share?
Ivy Zelman: Put some context around it. When I started covering the industry in the early 90s, the market share for the public homebuilders was south of 10% and it's north of 50%. So it's been a very strong growth story over time. In fact, when you look at Horton and Lennar alone, they account for 30% of new home sales. So their head and shoulders above the other public builders. But when you think about why, the cost of capital is anywhere from 500 to 1000 basis points lower for the public. They have scale advantages, whether it's buying raw materials or they're dealing with bulk deals with respect to land purchases they're making, maybe more favorable terms. Certainly, the perspective would be that they have access to capital that the privates don't have. But I think overall, it's the scale and the purchasing power has been a big factor for them. Now, a lot of private builders that we interact with are doing exceptionally well and continue to have very decent growth despite the publics gaining share. So I think it's a story of a private builder in a regional market where they are dominant and well known and they have a good reputation, I think they can continue to thrive. But I think that the publics are probably looking to buy that private at some point. And so they've also done it through acquisition. I do think that there's a place for the private builder, but they do have disadvantages, especially when it comes to the access to capital, not just the cost of capital, but accessing capital and banks when they're pulling back. And that's their source. They're at a disadvantage. The scale from purchasing, whether building products, whether it be land, I think those are advantages the public will continue to derive especially. Because in this market environment, land is the most significant raw material. And it's getting harder to buy land that you can get entitled and take through the process in a reasonable time frame. In fact, land is the only thing that never came under pressure during COVID-19. Land prices have not abated and have continued to increase putting a lot of pressure on the overall industry. Another thing with the Biden administration is regulatory changes. Energy code changes puts pressure more on the private guys than it does the larger guys on the public side.
Willy Walker: Does the cost of land continue to go up at the rate that it has Ivy? I would imagine it makes you think back to 2006, 2007, where land pricing went up and you said, “Hold on a second. This thing comes crashing down, and people are paying that much for dirt.” Does the dirt market concern you right now, or does it make sense given nimbyism, regulatory hurdles, entitlement hurdles, all that kind of stuff?
Ivy Zelman: I think that the land market is pretty tight, and I think that it really goes down to the local municipality level. And so you have markets like in Phoenix, where maybe starts historically peaked in the 50,000, 60,000. They can't even if they want to build more than 25,000 starts. And that's a function of getting the land market getting finished lots getting approvals from municipalities. So the market is really strained. It's also having to do with utility hookups, transformers, and the water supply. There are a lot of constraints that were not prevalent 30 years ago, and nor were they prevalent during the GFC. So I think it's going to keep land in that more shortage situation. And the builders that have access to it will provide the volume of the product to the market so that they will continue to gain share. So I don't see any correction in land coming at the moment.
Willy Walker: 2023 new home sales were 666,000. I think your forecast for ‘24 is 660,000. So down about 6,000 units year on year. How does that play out going forward? Are you getting back to 2 to 3% growth on that new home sales number, or is there anything that would make that grow at a greater clip? And as a data point to give people listening in, the peak of the last decade has been, I think 830 some odd thousand in 2020. So that was the peak of new home sales in 2020. And we've been coming down to this 660-666 number. What gets it to get up to seven and 800,000 again?
Ivy Zelman: I think that's where the constraints are going to be the impediment. So it goes back to the idea of how much land can you put into your assembly plant and wind up or your manufacturing plant so you can actually put it down the assembly line. So that's the problem. And that's one of the reasons why even if you said rates were to fall dramatically, the builders would have a difficult time getting a number of new communities open and not being in a situation where they're selling out of communities that have nothing to replace it with, which is what happened in Covid. If you remember, during COVID-19, there were waitlists, and they were basically not selling a certain amount of product because they had nothing to replenish it with. And that fact is still the case. So even if we said mortgage rates are going back to four and a half, 5%, and it's like go goes and everything's great, the builders couldn't supply it. They would keep inflating the price of the home rather than trying to chase the volume. Right now, the reason why we feel more confident that volumes could increase in the low single digits is because they'll use price as a lever to sell whatever they want, whatever they need to. And therefore the volume will come at an expensive price if necessary.
Willy Walker: And as I hear you talk about the constraints on new supply, if we were having this conversation four years ago, I'd be asking you about Katerra and the modular builders and 3D printing and all of that. Is that concept completely out the window, or are there still investments in technology and 3D printing and things that might be able to change the cost of construction and supply side?
Ivy Zelman: There are definitely startups that are attempting to do so, but nothing significant. Nothing that has tracks enough that we should talk about. I thought about having one of those companies or anyone that's further along than the first inning to the housing summit that we're hosting in September. And I was chatting with our friend Stuart Miller. He said no Ivy, there's nothing good enough to bring to the summit. There's nothing that far along. One of the industries that we're looking at relaunching I used to cover in the 90s was the manufactured housing industry. And when you think about affordability, I think that industry is under the radar and has definitely built factory-built homes similar to what Katerra wanted to do. But I don't think that people have really taken a hard look at those companies, but they're providing what Katerra was attempting to do. But they've been doing so for decades, and it's improved. But if you go to one of their factories, which I have and even recently in the last few years, they have an assembly line, and they're moving through with everything produced in the factory.
Willy Walker: You have a problem there as I've always seen that. And as you well know, we do a lot of financing on the manufactured housing side on the W&D side, the nimbyism as it relates to however you want to call them, most people go to mobile home parks, is about as significant as nuclear power plants. It’s like, “People live here, you're going to go build a nuclear power plant.” They think of Three Mile Island immediately, even though the technology has come so far. And as Bill Gates has done a lot of work on, that really is the future of clean energy in the world. And we got to get on it. We have to get over this branding. But it's the exact same thing on manufactured housing. Everyone says, “You're going to put a trailer park in my backyard. No way. We're not going to give you zoning on this.” And that's been one of the big impediments to entitling land to allow for that housing product to actually grow significantly. That stuff has been gold from an ownership standpoint. When we look at the number of big institutional investors who would love to buy up those properties, there's just no entry point because the people who own them are just sitting on a goldmine.
Ivy Zelman: Cash cows, yeah. I visited with Clayton Homes 2 or 3 years ago, and they were telling a story in Knoxville, where they're headquartered, where they had the product, and they've changed the pitch of the roofs, and it's been approved by Fannie to finance it. And they've made a lot of progress that actually you couldn't tell the difference between a manufactured home versus a site-built home. And we were in a cul-de-sac, and they were telling us a story that the homeowner saw a mobile home coming down the street, and they went nuts. Meanwhile, they had no idea their neighbor was in one because it looked exactly the same as the site built. So there's a lot of work to be done for the industry to overcome those perceptions. But the quality of what I knew in the 90s when I used to go to mobile home parks and visit various sites, it's nothing like it was back in the 90s. So they have work to do on changing perception, but that could help solve the affordability challenges that we have to assuming we get over the nimbyism and everything you just spoke of.
Willy Walker: You talk about the pricing power, if you will, of the publicly traded homebuilders. Inventories are building on the single-family side of things. And what do they do there? They are just going to give more concessions. There's been a lot of buyer financing that some of the big public homebuilders have been doing. Any of that cause you concern as it relates, or are they doing so well right now from a margin standpoint that they've got a lot of pricing elasticity, if you will, to be able to play around with inventories and make sure that they're selling at the proper margin and being able to continue to develop new homes.
Ivy Zelman: You hit the nail on the head. Exactly. They're still punching above historical, what we'd call normalized gross margin. So they have some cushion to take on more incentives, whether it be mortgage rate buy downs or whatever they need to do. But the benefits to turning the inventory and getting it sold to the consumer are tremendous benefits to their returns. And that's where the shift has been in the last several decades is bottom line profit or now more focus that shareholders have demanded for them to focus on returns. And that's what they've been doing. So for a Lennar and Horton, for example, they have pretty much no debt, and they have pretty high returns on capital. So for them, I want to move my inventory. I don't want it sitting on my balance sheet, and I want to drive whatever I need to. If it means lower gross margins and the expense of higher returns, I'll take that. And that's what the industry is moving towards. And they believe that will ultimately give them a better valuation.
Willy Walker: And the starts to orders index doesn't concern you right now. You think it's in a range where there's relatively bullish sentiment on the builders but not overly bullish and not pessimistic as it relates to starts to orders.
Ivy Zelman: Well, inventories building, the spec count is definitely above where I think everybody would like it to be. We saw a pretty big drop-off in June in starts. And so the question is now, is the market reconciling where we had a lot of spec moving towards your consumer wanting the move-in ready home. But wait a minute. Things are slower than it should be this time of year. We better take a step back. So I think the market will adjust. I think the builders are smart enough to recognize that if the market is slowed, they're not going to just start. They're not going to keep specing at the same level.
Willy Walker: And you all did a really interesting analysis as it relates to the savings rate versus single-family home appreciation and found that there was quite a significant correlation and a lagging effect. But where the savings rate was versus how much you could push pricing on single-family homes. Does the health of the consumer concern you a little bit right now, given that the savings rate has obviously plummeted since the pandemic, but that was at a 25% savings rate that we never expected to get again because everyone was getting checks from the government and all that stuff. But it's actually now below trend over a very long period of time. The trend has been about a 5% savings rate, and we're now at about a 3% savings rate. Does that concern you as it relates to single-family home appreciation going forward?
Ivy Zelman: Absolutely. And I think that looking back at the last few years, where home prices were soaring even in the last several months, in the first half of 24, when the market was more resilient than we would have anticipated, with that savings now depleted, what we've picked up in our June survey, I'm trying to see what month through. We just did a preliminary June. For the May survey, we indicated that affordability was one comment from our private builders that we surveyed were coming up more frequently and had more concerns. And so there is no question that the tie in the correlation to the savings rate being depleted is now showing up in more commentary and concern around the ability of the consumer to not only afford but might have pushed themselves too far and therefore might have taken on more than they could chew, in some cases.
Willy Walker: Let's shift for a moment to multi. You all just brought up your rent growth forecast slightly. Not a ton, but you had 1% growth in ‘24 and 1% growth in ‘25. And you brought those up to almost two for ‘24 and a little bit over two for ‘25. So a slight improvement. Positive trend. What's the view on the oversupply in multi. While I'm at it, I throw a whole bunch at you, and you can sort through what you want to answer. There's that great graph that you all put forth of the oversupplied markets and where there's downward pressure on rents. And then the undersupplied markets of the Midwest in the northeast, where you have lower supply, and you're actually able to move rents. And that's a fantastic view, at least my view of it as it relates to where you've got this oversupply that's putting the downward pressure and then the undersupply where you've actually got the ability for rent growth. Talk for a moment about the general outlook as it relates to the inventory that's out there today, that's put the pressure down on rents. And then why you all revise rents up for the ‘24 ‘25 outlook?
Ivy Zelman: I think first on that, the rent inflation, or the adjustment that we made, although slight is really because maybe we took it down too far to begin with. And recognizing that in ‘24 we have seen more resiliency and stabilization in multifamily rent rates. So I think that while we're a little concerned still that we can see competitive pressures in those really supply-related markets, we do think that where we are now is closer. It might even still be too conservative. We don't expect much more pressure than we've already experienced in ‘23. But I think that when you look at the national footprint, the Midwest and Northeast and areas where all the fast money that wanted to be in multifamily and all the developers, with all respect to them, they go where the population is growing, right where they go to the southeast, they go to the southwest, and where you had more affordability as well. And you can build, and there you can develop. So there's just a lot more competition in those markets that you are now seeing the pressure as a result of why rent rates are going to go higher. And whereas in the Midwest and the northeast, no one's really doing a lot of development, and therefore you have a lack of supply that can allow for rents to be stable to higher. But I think the mix overall, we're probably in that two ish percent feeling pretty comfortable there. And it could be that some markets are negative, there are otherwise there could be markets that are closer to 4 to 5. I remember talking to multifamily operators who would do cartwheels if they could get a 2 to 4% rent rate. So we're in that low end of the normal range we think.
Willy Walker: And on completion, one of the things that a lot of people have been looking at is how much inventory came in at the end of ‘23 and the beginning of ‘24. You all right now have completions for ‘24 at about 540,000 and completions for ‘25 at about half a million, 500,000. That's quite a lot. Are you feeling given the absorption that has happened over the last 12 months, you feel pretty good that that type of delivery volume can be absorbed by this market? And then we'll go to the new supply because that drops down significantly where the opportunity sits, as you said previously. But talk for a moment about absorbing 540,000 in ‘24 and another half a million in ‘25.
Ivy Zelman: I think the market is deep enough that it can absorb it. I think the question is, are the operator developers are they going to be able to deliver in the cycle time that we expect them to? It's been elongated and surprising to us how the lack of completions has come to fruition over the past several years. And then we had a spike in completions, and it was absorbing it, and we saw the pressure. So year to year, the completions that we have had a lot of volatility and have had more to do with just getting everything to the cycle times that have been delayed supply chain issues. And municipalities holding up approvals. There's been so many delays, especially in high rises. So we think it can be absorbed. And we do think that there might be again some pressure in those markets that have the most supply that will get delivered. But we think the market will absorb it.
Willy Walker: And then if you're thinking about a 24 to 36-month development cycle, right now you all have started for ‘24 at about 300,000. So the thinking there is you're going to get a pretty significant step down in the ‘26, ‘27 timeframe given the dramatic drop off in starts. Correct?
Ivy Zelman: No, I think that makes us feel more optimistic that there could be a turn coming that would be beneficial to the multifamily developers if those are looking to break ground and start more potential development, it might make sense. And it's assuming they're going to deliver in ‘26.
Willy Walker: And I think you have 3% rent growth in ‘26, which is still below the historic average of 3 8.
Ivy Zelman: I would say we look at it at a range of 2 to 4 in that range. But you know.
Willy Walker: So it's getting back to trend. But it's certainly not what a lot of our clients have been used to over time.
Ivy Zelman: That's not the robust pace that we saw over the course of the last several years before the turn. But those numbers weren't sustainable. No one believed it. And I don't think your clients believe that those numbers are sustainable in the high single-digit rent growth. So certainly renting is still more favorable than buying. There's a lot of inflation that we've seen in monthly payments for renters as a percent of their income. So there's only so much you can keep pushing on the gas before somebody is going to cry, Charlie. And they can't afford it. More doubling up and roommate situations will start to come to fruition.
Willy Walker: And what's your take on that as it relates to the overall macro trend as it relates to household growth? You all did an amazing cradle-to-grave analysis that was talking about, if you will, the slow growth of our population and the need for both more immigration or more population. As we look at immigration policy being front and center, nobody really wants to do anything about it. And, who knows who gets elected president and what that ends up meaning as it relates to any actual action on the border legal, or illegal immigration. What's your view as it relates to the overall macro-outlook for housing over the next, I don't know, 5 to 10 years?
Ivy Zelman: Yeah. We actually just updated Cradle-to-grave.
Willy Walker: Neat, I got to take a look at it.
Ivy Zelman: We're more optimistic. I know you'd like that. We raised our population forecast by 100 basis points in household growth, also accelerating with the fact that immigration was definitely a part of that revision higher. Even though immigrants tend to have a very low headship rate, they don't have Social Security numbers, not coming into the country and buying or renting at the first point of entry. But eventually, that will increase headship rates, and will start to benefit from that.
But we also saw from 2020 through 2022, there was greater than what we would have expected young adults leaving home. For a while, the numbers were post-GFC. Young adults were living at home way longer and way above the trend line starting really in ‘20 through ‘22, which is all we have in three years of data. We saw a significant shift to leaving home. And that's also benefited the growth in households. We expect the heavy lifting might already be done, but it pushes the overall household growth numbers higher. And so I think that's a benefit from a macro perspective to the need for more shelter. And I think multifamily will be a bigger beneficiary from that increase in household growth in terms of various asset classes, multi should be the biggest beneficiary.
Willy Walker: Super interesting. As we started this conversation, the numbers look like they're trending well, but trending slowly, and that's fine, and people can play into that. As you look at the landscape and you say single-family homebuilding, single-family sales, multifamily build, multifamily ownership, SFR, BFR, and then you all we haven't spoken about it, but you also cover the home improvement market, but I don't want to dive into that too deeply. But as you look at the landscape, where are you saying right now there's real opportunity? I go long in that space. Because either there's no money there, or there's actually a lot of money that's missing the overall opportunity.
Ivy Zelman: I've been a big proponent of build for rent. I think that people prefer brand-new homes, and they want that single-family experience. I think that the difficulty is given the cost of capital is penciling the returns at that elevated cost, and therefore we've seen a significant slowdown. So let's assume that some of the market participants are not as tied to whatever borrowings that they need. I think there are opportunities in that space. And a lot of capital that was allocated has been arrested. So there's an opportunity for the deeper pocket money to come in and maybe do more communities with build for rent. I still think, just generally, the rental cash flow machine is very compelling versus merchant building and kind of having to build your factory after you sell it over and over again. I do think there are benefits to being in multifamily, long-term cash flowing annuities as well as in SFR. So I like the rental product if I'm an investor because I like the idea of getting that cash flow and continuity. But I think as we think about the land costs and the cost of capital, it's tough out there. It's not like we've seen a big pullback in land values like we said, and we haven't seen a lot of… labor costs have continued to move higher. We haven't seen any abatement in labor costs. So it's harder to pencil an attractive return. But relative to treasuries for example, people were like “Why would I want to own a multifamily given where the long rates are or even the money market?” So as we start to see the shifting of the yield curve, there might be more of an interest. But just strictly fundamentally, I think that we're going to need more rental stock. The for-sale market will continue to carve its way into the existing market, given the old dated stock. Nobody wants those old homes, and no one has the ability to refurbish them completely. So I think the new home market, relative to the existing market, wins, but I think that the rental stock will be more attractive as an investor because of that cash flow and the returns that you would get if you get that cost of capital down.
Willy Walker: What you thought about. You mentioned that when you started covering single-family home builders, they had less than a 10% market share among the publics. Now they're over 50%. Do you think there's a similar runway here for the publicly traded multifamily developers/owner operators that you've gotten on the public homebuilders? I never thought about it before, I don't know.
Ivy Zelman: Yeah, I don't know. It's.
Willy Walker: Plays into it.
Ivy Zelman: It’s so fragmented. And I think that they're not as acquisitive and looking to acquire as much land. A lot of them aren't necessarily developing. AvalonBay as a developer. You've got Mid-America, you've got some, but not all. So I don't know that they're that like growth mode as much as sustaining and pruning the portfolio and buying and deposing dispositions of some of the assets that they no longer want. So that's been more of their strategy is keeping the portfolio not necessarily growing at a faster rate but keeping the right assets in the portfolio. And there've been some acquisitions, as we've seen. But I don't know, it's a good question.
Willy Walker: Yeah. I was in Chicago for a conference a couple of weeks ago. One of the things that was discussed was the fact that now that we've gone through the GFC and through the pandemic, the two commercial real estate asset classes that held up really well through those two were industrial and multi and that now that's happened twice and most people who have been investors for that period of time, they sit there, and they say “The normal distribution of institutional investment in commercial real estate, back of the envelope used to be 25%, 25%, 25%, 25% across all the asset classes.” And now there's clearly an overweighting towards industrial and multi. And those people who have platforms that can actually take down sites, build multi, manage multi efficiently are sitting in a really good position with the general macro trends you just talked about, as well as, I would say, the over allocation of institutional capital to multi and industrial going forward. You and I meet with a lot of people who either own offices or, at one time or another, have been an investor in offices. And you say to yourself when will that market come back? They'll clearly be people who are going to make great trades and make a lot of money off of office over the next decade. There's no doubt in my mind, but the thought that some core fund is going to come in and say, “Oh, let's go to a long office right now,” or even retail or hospitality those are becoming much more niche investments versus industrial and multi. And if you take the macro backdrop, you'd say, “Go long multi-owner operator developers.”
Ivy Zelman: I think you just said something when I think about the public builders, the view that these guys were driving around in a pickup truck, and it was a pretty risky business and buying land and speculating and building homes that they haven't yet sold. There was a lot of negativity perceived by institutional investors in terms of how cyclical that industry was. Whereas in multifamily, the perception by the institution is it's a very sound investment that generates very strong returns, cash flow machines. So when I think about fragmentation, I think it stays fragmented just because there's so much institutional capital that will continue to allocate money where you don't have to be a part of the public entities. Unlike the publics that didn't have that same demand competing for land and opportunities that today, there's even more speculation from institutions that are now looking at the for-sale market. And maybe Apollo wants to be a land banker, and they're coming at it from a different perspective. But there's still more hesitancy on the single-family new construction market as compared to the optimism long term for multi. And what a great business it is.
Willy Walker: Yeah, super interesting. Ivy, it's been great.
I want to thank Ryan and Alan and Mark and Jesse and Adam again for having supplied me with such great data to be able to ask you good specific questions. I hope they were good. They were clearly specific questions, whether they were any good or not, I don't know. But thank you to that team of absolutely fantastic analysts, and thank you for all of your insight. A really great session. And, thanks.
Ivy Zelman: It's been a lot of fun. I would say, please join us at our housing summit in September. Willy, you'll be there. We're in person for the first time since COVID-19, so we're excited to be in Boston on September 12th and 13th. And if you're interested, just reach out to kim@zelmanassociates.com and join us. Should be a lot of fun. But thank you, Willy. This is awesome and I hope we shed some light on what's happening in the housing market for your viewers.
Willy Walker: Thanks, Ivy. Have a great day. Thank you for joining us.
