Is the Market Recalibrating? with Ivy Zelman, EVP & Co-Founder of Zelman, a Walker & Dunlop Company
Willy Walker: Good afternoon, and welcome to another Walker Webcast. It's my great pleasure to have my friend and colleague, Ivy Zelman, join me for… I don't know what, actually, Ivy. I didn't go back and count all of them…but I know at least you've joined me on five Walker Webcasts, if not more. I actually this morning was back looking at my notes, Ivy, and the first time I had you on the Walker Webcast was almost exactly five years ago today. It was on August 25th, 2020, in the depths of the pandemic. That was the first time you and I got together on the Walker Webcast, which just jumped out at me. I was like, “Wow, has it really been five years since the two of us had our first discussion?”
Ivy Zelman: That is cool. I didn't realize. Yeah.
Willy Walker: I obviously watched you on CNBC earlier this week. You and I have a lot more time here to dive into a number of your answers to Joe Kernen on CNBC. He was trying to get you to both predict rates, Ivy, as well as pick some winners and losers in the housing market. I will say it was only a seven-minute segment. The seven-minute segment on CNBC is quite a long segment actually. But the two of you didn't really have a whole lot of time, and you were smart enough to dodge the question as it relates to where rates are going to go. I'm going to try and push you a little bit on that as it relates to Zelman's outlook, and as it relates to hiring for longer. I certainly know I'm not going to get you to pin down where you think the 10-years are going to be at the end of the year or a year from now. As I was doing my research for this discussion, I went through and looked at Zelman's research year to date. The earnings season for Q2 was very strong, and we've got year over year 12% profit growth in the S&P, and we'd beaten consensus by about 5% across the publicly traded companies in the housing sector. It's been interesting as it relates to the covered sectors in housing that Zelman covers, as it relates to the performance of various companies in various sectors. Let me just run through those and then give that as a backdrop for you to dive into what's both surprising to you and, if you will, disappointing to you as it relates to year-to-date performance. So, if you look at the mortgage industry that you all cover, it's up 48% year-to-date. This is as of the day before, or yesterday morning, where this is. It is up 48%. Furniture is up 17%. Building products are up 13%. The home builders are up 11%. The S&P is up 8%. You get to the manufactured housing, which is actually off 3%, which you've just started covering. You've got SFR (single family rental) off 6%. And then you have the apartment REITs off 10% year to date. So, talk that through what out of that performance year to date in all the various component parts of housing, both is a surprise to you and also what's a disappointment to you.
Ivy Zelman: Well, as it relates to the stocks, which tend to disconnect from fundamentals (at least current fundamentals), I think that the outperforming sectors within our ecosystem really is attributed to the expectation that we're going to see lower rates and the Fed is going to start cutting, which is typically when you start to see those sectors on the “for sale” side, mortgage side, building products outperform. On the flip side, the multifamily and SFR as underperformers is the expectation that the “for sale” market will start to gain some traction at their expense. Now, I don't necessarily agree with all that, but that's the expectation I think that you'll continue to see as long as there's the perspective that the Fed is going to cut, whether it's 2 ‘25 basis point cuts before year end and continue to cut into ‘26 as the likelihood that Powell steps down and we get a replacement. That seems to be what's driving a lot of the stock's performance right now.
Willy Walker: In three weeks, you and I will both be in Boston for the Zelman Housing Summit. You always start that off with your State of the Housing Market keynote. Give us a preview of what you're going to be talking about as it relates to the state of the market and the key themes that you'll be underscoring to the people attending the housing summit.
Ivy Zelman: Overall, I think we're trying to just dissect what's happening in the fundamentals and appreciating that one of the big drivers for the for-sale market, at least on the new home construction side, has been rate buy-downs and sort of exploring the impact that longer-term rate buy-downs have and the implications for profitability. That will be one part of the discussion. For the builder side, we'll talk about pace versus price and our expectations for elevated incentives to continue to pressure price. We'll be talking a lot about overall consumer credit and anticipating some challenges, some headwinds that we see out there. One, for example, is student loans that are seeing significant defaults, and the likelihood is we're going to start seeing in September wages being garnished. That's a real headwind. We'll also talk about what's happening more broadly in the rental market and the opportunity for the rental to continue to provide shelter for those who are challenged on the consumer credit side. Those are a few points on top to come to mind, but lots to explore on the cost side, whether we're looking at the cost of labor, cost of land, overall building product, or input costs, we'll be diving into that as well.
Willy Walker: So, when you and I spoke back in January, you mentioned that at that time, we hadn't gotten to Liberation Day yet. Tariffs were only a concept at that point rather than that chart that the president put out in the Rose Garden as it relates to the tariffs they were going to apply on countries. We clearly haven't gotten that chart, if you will, coming to fruition, but we've clearly had new trade deals done. At that time, you thought that tariffs would add 3% to 5% inflationary pressure on building costs. Talk for a moment about that. It's clearly early days. Everyone's trying to figure out how tariffs are playing into everything from GDP growth to the inflation print, and to the cost of housing. What are you either seeing or either surprised at to the upside or concerned about to the downside as it relates to the impact of tariffs for housing?
Ivy Zelman: Well, for the new construction market, actually, the tariffs have not had any inflationary impact whatsoever. In fact, overall input costs, direct costs are down for most builders, down, call it 1% to 3% for the largest builders in our sector. That's really given the fact that spring was a bust and back in January, the spring selling season didn't materialize as many would have hoped, given the lack of affordability. So, builders have been pushing back to their vendors and threatening to switch. They've really had success in not realizing any of those price increases that the vendors have tried to push through. Flip that to the home improvement market where there has been more success for vendors to realize price. We're continuing to see that reflected in Home Depot and Lowe's results. They're definitely seeing some upward pressure on the price that they're passing through to the consumer that they are realizing. So, it's a bit of a tale of two markets where the home-improvement market's feeling the tariffs, but still relatively marginal. And the new construction market is actually pushing back and not seeing any impact as of now.
Willy Walker: It's early days. Clearly all the trade deals have not been negotiated, so it's impossible to know exactly what the overall tariff rates are going to be. But so far, it's shown up in two different parts of the segment. What's your take from here in the sense that a lot of people are saying tariffs will make their way into inflation or make their way into a downward pressure on GDP growth if they stay in place? I don't think anyone is thinking that either the president capitulates and doesn't continue forward on these trade deals or that the trade deals that he's already struck don't stay in place. So, as you think about a print over the next year, from both a GDP standpoint, as well as an inflation standpoint, do you think we see market changes due to tariffs in either GDP growth or in the inflation rate?
Ivy Zelman: No, in my ecosystem, I'd say it's going to be a combination of tariffs that will be inflationary in the home improvement market, but we'll see continued offsets and new construction. New construction is a much smaller piece overall in terms of the impact, so it could be slightly inflationary and probably leads to keeping rates higher for longer, at least stubbornly high on the long end of the curve if those tariff increases continue to hit the market. We already know the consumer is so stretched. So, unless we had some significant rate relief for other reasons, I think it's going to be, and they're upward biased to inflation, at least within the home improvement market.
Willy Walker: Dive into that for a second as it relates to inflation and the dual mandate of the Fed as it relates to both the cost of goods and on the other side, employment. Employment has held up quite well as we've had tariffs implemented, but again, it's early days. And at the same time, we haven't seen inflationary pressure. Which one of those two do you think makes it so that the Fed either can cut or doesn't cut as it relates overall to where their dual mandate? Which one of those two do you think they will really start to focus on as it relates to potential cuts in 2025 and into ‘26?
Ivy Zelman: I think it's above my pay grade.
Willy Walker: No, it's not.
Ivy Zelman: I would say that employment is going to be critical, and if we see slowing job growth, I think that's going to be a catalyst for them to act more aggressively on rate cuts. Because I think that's what's really allowed for more resilience in the economy. So, if you start seeing job losses impact the market, I think they'd be quicker to act. Especially if tariffs have remained sort of in this not really negatively impacting GDP, but the expectations it could. I think they'll act more quickly if we start to see real pressure on jobs.
Willy Walker: And when you say real pressure on jobs, what do you think that number is? Do we get to 4.5? Do we get to 5? Do we need to see 5.5? Obviously, this dives into the stats and the Bureau of Labor Statistics and things of that nature, but what unemployment number do you think gets the Fed to really start acting aggressively?
Ivy Zelman: Will Powell be in office, or will there be a new governor? Because the expectation is we have a very dovish governor replacing Powell, and I think any upward pressure on unemployment would give enough ammunition to a dovish Governor to start cutting. So, I think it really depends on who's sitting in that seat, but whether it's 4.5 and an upward bias to that, I would think they're going to start to act even if it's only, what is that, 30 basis points from here.
Willy Walker: And so right now you're thinking that we'll get one or two cuts in 2025.
Ivy Zelman: I don't know. I mean, I just follow what the expectations are that are priced into the market. I think right now the probability of two cuts has diminished, but if again, employment slows faster than expected, it could be two cuts this year. I just don't know. What troubles me, Willy, is that the expectations are that Fed cuts will result in improved affordability, but we know the Fed can only control the short end of the curve. Therefore, we're less optimistic that it really helps improve affordability at the long end, especially given the deficit and the expectation that tariffs could lead to inflation. It could be stubbornly higher for longer, even if the Fed is cutting. Couple that with auctions that aren't really being met with strong demand, whether it's foreign buyers or just people's expectations that they don't want to reduce their exposure to U.S. Treasury. So, I think there are some headwinds on the way. Therefore, I'm less focused on what the Fed is doing and more focused on what's going to really improve affordability, and we know affordability is the worst that it's been since the early ‘80s when mortgage rates were at double-digit levels.
Willy Walker: So, I want to just really quickly put a data point behind what you just said, and then I do want to dive into affordability. We went back and looked at the nine easing periods since 1980. On average, the Fed funds have dropped 2.32% over those nine easing periods. And the change in the 10-year average was down 72 basis points. So that's taking all nine periods and just averaging it out of what did the Fed cut and what did that turn into as it relates to, if you will, relief on the 10-year. If you then go and look at when they cut based around a recession, that is, on those, the Fed has cut 4%. What you get in the 10-year there is a 1.56% decrease in the year but outside of recessions the actual Fed cuts have only been 97 basis points, and the resulting pickup, if you will, in the 10-year has only been 6 basis points. Cutting outside of recession and cutting inside of recession is dramatically different. I think to your point, Ivy, a lot of people, particularly in the commercial world where we obviously spend every day, are sitting there saying, “Oh, Fed's going to cut, and that's going to bring the 10-year down at a similar rate or maybe slightly less.” And what the data would tell you over the last nine cuts is, unless it's around a recession, you're not going to get that significant a pickup in the 10-year. As a matter of fact, it's only 6 basis points when the Fed is cut on average close to 100 basis points.
Ivy Zelman: Yeah, and I think outside of a recession, we're also looking at headwinds that really didn't exist before, and i.e., the deficit that is now the elephant in the room that's not being ignored, as well as the continued pressure from inflationary upward pressure on tariffs that could continue. So, the dynamics are different outside of the recession, in addition to what you said, where the modest improvement in the 10-year outside of the recession has been the case from a historical perspective.
Willy Walker: I heard you say on CNBC that right now, some home builders are able to buy down rates to sub 4%, you said 3.99% is a rate that you could get if you go and buy a new home from one of the major home builders. And yet, even with those rate buy-downs, you're not seeing a significant increase in sales. Two questions on that. That seemed to be a huge stimulus effect on home sales in ‘23 and ‘24. Why is it not a stimulus effect in ‘25? Then I'm going to go to gross margins to the home builders after that, just because we've seen some degradation in those gross margins, and I believe that's coming from those buy-downs. But answer that question first on as it relates to the stimulatory effect of those rate buy-downs and why that isn't driving sales right now as it did in ‘23 in ‘24.
Ivy Zelman: Well, really, the stimulatory benefit started in the second half of ’22. As rates spiked early in ‘22, we did see the builders, for about six months, really see a very sharp slowdown, and then they prudently brought in buy-downs. And that became a catalyst for activity to improve, which continued throughout ’23, and ‘24 had been more challenging. And I think the second of ‘24 really was a function of credit quality that had diminished. I think inflationary pressures on our first-time buyers have eaten into discretionary income ability to save. The credit scores are under pressure. Delinquencies are rising in various consumer credit sections or segments, such as auto and credit card delinquency. So, there's more pressure on the consumer. What we hear from builders, typically like D.R. Horton, just, we hosted them on a Zoom call right prior to this call. One thing management said is they're buying down anywhere from 100 to 150 basis points from the prevailing rate. They'll do a 3.99 selectively on standing inventory they want to move, so they might advertise that. But they're generally doing, call it if rates are called 6.5, they're going down to 5 or 4.99, more than the 3.99 that we see advertised. But the reason that we are told they're going that low is that they can't qualify the buyer without a rate that low. So, there is definitely more pressure on the consumer that has manifested itself since ‘22 when we first started seeing rates move higher. I think that might be the big difference today versus what we saw earlier on in ‘22 when we saw the benefit for those rate buy-downs. It's kind of one of the concerns we have is the rate buy-downs, which are very expensive to buy a 30-year fix down, six to eight points or more, depending on how low they go. How do builders ever get off of that incentive? Call it a treadmill. In fact, our survey that we published for July just showed that on a scale of zero to 100, our incentive score, 100 being bad, was a 92. It was an all-time record incentive feedback. So, I don't see it changing very much. Now, Toll Brothers reported yesterday, and they were a bit more optimistic. They had their call this morning. So, I think we're in this world of the haves and the have-nots becoming much clearer. I understand why the Toll Brothers customer is better positioned. We also have the stock market hitting new records since Liberation Day. We've had a massive rally off the bottom. That's helped improve consumer sentiment, but it doesn't change the lack of affordability for that first-time buyer who's really struggling, and discretionary dollars are not there to save. And that's really why people are staying in rentals longer.
Willy Walker: So, there's so much inside of all that that I wish I could ask 5 questions simultaneously to you on all the things that you just said. So, we have a real affordability problem. We've got the home builders putting incentives out there to move inventory. We have increased our inventories up dramatically over the last two years. The inventories have moved up, I think, 45% from Q2 of 2023 to Q2 2025. So, we have a significant amount more inventory. As it relates to margins, one of the things that you did mention, Toll Brothers' gross margin dropped from 28.8% in Q2 of last year to 27.5%. That's Q3, sorry, the Q3. It went from 28 point 8% in Q3 of ‘24 to 27 point 5% and Q3 of ‘25. So, you're seeing some real degradation to the margin. And that's even with Toll Brothers, who, as you made a quick point to, is at the very, very high end of the single-family housing market. They're building a product that is well over, on average, $500,000 per home. Am I correct? Am I not?
Ivy Zelman: There are median prices of a million dollars now. So median prices, they actually have what they call luxury, affordable, luxury, affordable, affordable luxury homes. But I think margins are under pressure for builders above and beyond the incentives as well. Because keep in mind, the land that they bought pre-COVID by the end of ‘26 will be all absorbed. It's been solely diminishing as a benefit, and land is a third of the cogs. So that has also been a margin headwind for them. And right now, because the market's softer, they are trying to renegotiate with their land developers, whether they have option contracts with them, but it's stickier. That's the last piece of the equation to actually start to improve. Keep in mind, one thing I forgot to say on that earlier question was that the other factor that's really changed dramatically since ‘22 is that the existing home market has seen inventories rising substantially in many markets, not all markets across the board, but inventories are up about 20% from a year ago. And we look at markets relative to the inventory, where they were relative to 2019. And some markets that are seeing very good pricing activity are still well below where they would have been pre-COVID, whereas markets like Texas and Florida markets are well above, 20 to 50 to 60% above, where they were pre-COVID. So, the dynamics of the existing market are also negatively impacting the ability for consumers to sell their homes. And therefore, there are people taking homes off the market because they're not getting their aspirational asking price. So that's a part of the equation that's also been a dramatic change from where we were when the rate buy-downs were working and builders were gaining share at the expense of the existing market.
Willy Walker: So, the lock-in effect, which your team just published on, right now, by your numbers, 72% of mortgages are below 5%, 54% are below 4%, and 39% of existing home mortgages are below 3.5%. So that lock-in effect has a huge impact on the existing inventory, and yet you're saying that now we're seeing a step up in the amount of existing inventory coming on market, which somewhat belies that data that I just put out there. Is that just because it's just the kids who have moved out and gone off to college, like you and I both have, and it's time to downsize? Is it that I'm a baby boomer and I'm ready to downsize after living in a suburban home? Or is that that people actually want the cash from their home because they've got so much built up equity in there that they're willing to swap out for, if you will, a higher current rate because they just got the trapped equity that they need to tap into at this time in the cycle?
Ivy Zelman: All the above. And I knew you were, I mean, think about, you know, real estate has become in the last decade, post-recession, GFC, a popular place to park your money. So, if you're an individual investor that may own 10 homes, let's say in southwest Florida, where probably Fort Myers, that segment of the market is probably one of the worst parts of the country right now in terms of the existing housing market. You know, you're maybe a second homeowner; maybe you're an investor that's pruning their portfolio. The cost of insurance has skyrocketed; homeowners' insurance, as we know, and property taxes are skyrocketing. So, people are taking chips off the table, and in some cases, it's not just primary sellers; it's second home sellers and investors because you don't see the same magnitude of second homeowners and investors in, let's say, the Midwestern markets, where they're still performing fairly well. So, I think a combination of regular life occurrences, the realtor community has got the three Ds: death, divorce, and default drives transactions, no matter what's happening in the economy. What we were missing was the discretionary sale. So now you've got fear that's in the market. And fear causes people to move more quickly because they're worried that the equity that they've accumulated could erode. I'll give you a great example. I use this quite often, but my architect in Cleveland called me about a second home in Southwest Florida, and he's like, “I can't believe it. I can tell that I am in one showing.” So, I said, “Well, when'd you buy it?” He said, “Five years ago for $400.” And I said, “Well, where'd you list it?” “980. I've since lowered it to 775, and I still can't see it on one showing.” And he's getting divorced. And I say, “You know what, Rick? Don't be so egregious and lower it to half a million, and I promise you'll sell it.” And he did, and he sold it. So, I think people have this expectation that they should get yesterday's pricing, but when in fact they start to think, “Oh my God, my equity is going away. I'd better get at least some equity.” So, I think that's also what's happening. But it's very difficult without having the ability to ask the realtors, “Who are your sellers; who's selling?” If you look at the data from Texas and Florida, and the Carolinas, we saw a spike, a substantial spike in migration, inbound migration. Now we're seeing outbound migration that could be related to, again, people realizing they don't want a second home, or the congestion and traffic, and the cost of holding. Those assets in these markets are again due to homeowners' insurance and property taxes. So, I think the migration is normalizing, but that's also part of it because really, you can divide the country into the good and bad markets. And the COVID winners are now the COVID losers. They're the ones that are seeing the most pressure, where we saw the most inbound migration, as well as where builders are the most concentrated. So, if you were to say, where do builders have the highest market share? And by the way, not just builders in total, but where are Lunar and Horton present with the largest market share? You can see that those markets are going to have the most pressure because they're offering the most incentives, and they can really dictate the market trends.
Willy Walker: You mentioned Lennar and Horton. I think in 2024, 45% of new homes constructed were constructed by the top 10 publicly traded home builders. Talk for a moment about the increased consolidation in the home building market post-GFC, because it was a much more fragmented and diversified industry, and what you've seen over the last 15 years is this continued consolidation into the large publics. Is that good or bad for the overall housing industry?
Ivy Zelman: Oh, well, I think the public builders overall, not just looking at the top 10, account for roughly 57% of new home sales today, just to give some perspective. I think after the GFC, we were at roughly a third. And when I started analyzing the industry more than 30 years ago, it was in the single digits, high single digits. So, cost of capital is about anywhere from 500 to a thousand basis points better for public companies. They've got scale advantages. They've got better negotiations with vendors in terms of getting better deals and rebates. So, there are real advantages to just scale and cost of capital. And those advantages have given them much higher market share in individual markets. Is it good or bad for the industry? I think it's not good for the private builders that are trying to make a living. They're having a difficult time keeping up with the significant incentives that builders are offering in the public arena. But in terms of the consumer, if you're a buyer in the market, the public builders are trying to create affordability. I think that's a good thing for the consumer.
Willy Walker: I had Ryan on from Pulte, thanks to you, back in the spring and pointed out to him that in 2005, Pulte delivered 45,000 new homes. In 2024, they delivered slightly over 30,000 new homes, and my question to him at the time, Ivy, was, “Isn't there a market there for you to get back to delivering 45,000 new homes a year?” And the response he gave me was, “We like our size right now; we like the scale that we're at.” They also like the profitability that they're generating on building 30,000 homes versus 45,000 homes. So, if the publics are doing really well, ROEs are doing well, and EPS growth is fine at their current scale, who's going to fill the void as it relates to the need for single-family, and then we can get to multifamily in a moment, but single-family housing, if the publics dominate the market so much and the ability for someone to be an upstart and get into it to create new supply isn't there. I saw Urban Institute came out with a study recently that showed that we really only have 2 million housing shortage in America, which you are more inclined to believe that it's that lower number than there are plenty of people out there were saying that we're, we're missing four to 5 million homes at the end of the day. I don't care whether it's one, two, three, or five, bottom line, if we have a housing shortage. Two weeks ago, we had Tucker Carlson, Laura Ingram, and Elizabeth Warren all on national television. All three of them are saying, “We have a housing crisis in America.” So when you have people across the spectrum from that diverse of Tucker Carlson to Laura Ingraham to Elizabeth Warren, all saying we have a housing crisis in America because housing has become unaffordable, and yet we have the large publics who are making very good money and seemingly not having an incentive to increase production, where does it come from?
Ivy Zelman: Well, let's back up a moment because where, you know, Pulte is and where the builders are overall, their earnings are down a lot. Their gross margins are down on average 600 to 800 basis points, which is probably, with the exception of GFC, the worst margin performance we've seen. So, they're struggling right now. Their backlogs are down; their orders are down. Their earnings are down. Their ROEs are down. Looking at what their plans for growth right now are might not be the best indication of future plans. D.R. Horton said they're going to do 80,000, maybe 90,000, depending on what the market dynamics are. So, they're still going to try to grow overall. Maybe Pulte's a little bit more unique. But I would say that the shortage that everyone likes to talk about is rhetoric, because at the end of the day, we have a shortage of affordable housing. So, we can talk about shortages till we're blue in the face, but the real impediments to providing affordable housing start with land costs and regulatory pressures. Until we adjust and figure out how to build houses at a more affordable price point, we're going to have young adults still living with their families. Our kids might be a little bit better off than other people's families because we have affluence that we can help our children. The wealth transfer is definitely helping many families, but other families don't have that benefit. So, we have young adults living with their families and dual households that are going to continue to be elevated relative to normal. We'll go back to the 1980s, 1990s. 15% of those 20 to 39-year-olds lived with their parents. Now we're at 21 plus percent. And why is that? Because they can't decouple from their families, because they don't have either the down payment or their credit quality, or they just don't have the money to buy. So, I think that whether it's a million, two million, or three million formula, I don't really care. We're not providing affordable housing.
Willy Walker: I listened to the All In podcast yesterday in the car from two weeks ago, and they used a stat, so I don't know where it came from, but they said their stat was that only 12% of 30-year-olds in America today, 12% are married and own a home. And they were basically saying that both the institution of marriage as well as homeownership are under significant pressure. You and I both know the stat that the average age in America for a first-time homebuyer has moved up to 38 years old. So that fits a little bit with their data, as it relates to only 12% of 30-year-olds in America being married and owning a home. But if I go back to it, if Tucker Carlson, Laura Ingraham, and Elizabeth Warren are all sitting there saying, we have a housing affordability crisis in America. And if people can't aspire to buy a home and create a family, using what Tucker Carlson said, the American dream is lost. So, you hear that we have an affordability problem, not necessarily a manufacturing problem. So, what can we do? What is the alternative right now as it relates to trying to bring down the cost of housing, because this is a real crisis, if you will? There's no incentive we can give to Toll Brothers or to Lennar to increase the manufacturing of their housing product. We can't wave a wand over local regulation as it relates to NIMBYism and land entitlement. So, what are the levers we can pull other than potentially rates coming down, but as you very clearly said, even with a new Fed chair and even with 50 to 100 basis points of cuts the actual rate that drives housing is unlikely to move very far.
Ivy Zelman: I don't have a good answer for you. I know that there are regulatory changes that could be made that would, in fact, help. We've talked about the impact fees that are pushed to developers have, that are significant headwinds for providing affordable housing. Builders are trying to de-content homes and reduce the skews in homes. I think that it's really the local market that dictates it. More builders are building purposely built homes for rent, so people who want a single-family experience, those that can't afford the down payment that own a home today, can at least rent a single-family home. That to me is not a solution, however, because you can't create wealth over a lifetime by renting. So, I don't have the answer, but I think that the builders, at least Lennar, Stuart Miller, talking with Stuart, they want to drive improvement in affordability by continuing to reduce price. So, whether it's higher density, building more homes per acre, there's going further out, sprawling further out to markets where, I jokingly call it, where the cows don't even want to live, they're doing that. Land is much more affordable, so people have to drive to qualify. But eventually, rates are the key element. How are we going to get the other elements of the cost of housing down? The cost of materials, we just talked about, builders are fighting back, but the material costs continue to move higher. Land costs are stubbornly high. So it really has a lot more, I think, ammunition at the regulatory level to make changes and maybe the federal government can help, you know, tax your governors, you now go after the governors of the states and take away, like Trump's trying to do with universities, take money away from states that are not providing affordable housing because I bet you the governor would do a lot in each state to go to that local level and say, “You’ve got to stop this because I just lost this much funding.” So, I think there are some big sticks that can work, but it's got to come from the federal level, and they have to go to the state level, which trickles down to those local markets.
Willy Walker: My understanding from a conversation I had yesterday is that the Trump administration is working on an executive order to try and do many of the things that you just talked about as it relates to trying to, if you will, when I use the term ‘loosen up’ regulation that's not, I should say, if you will, deregulate at the state and local level to try and make it so you can get land entitlement and try and get more affordability at the local level, which has obviously been a challenge. On Monday, the Census Bureau came out, which is related to that, on some new housing construction data that showed stronger starts in single-family and multifamily. They had total starts at 1.4 million, which beat most expectations by 10 to 15 percent. And they had multifamily starts at almost half a million, which is super high and conflicts with almost all of the data that I've seen recently, as it relates to what's happening on the multifamily side as it relates to starts. Two questions on that. Does that data surprise you? And then second of all, it's data that's coming from the federal government, given everything that's just going on with the Bureau of Labor Statistics. What's your take on trusting federal data right now?
Ivy Zelman: Well, the start data was surprising to us. We were expecting a pullback. Permits were flat and were down year over year. We're expecting it to be down 8% this year. We've been seeing builders pull back on starts, given all the spec inventory you alluded to earlier. So, we don't really expect whatever blip in the market that might have shown an increase in single-family to be sustained. I think that builders are working through inventory and will continue to pull back on starts as long as the market remains challenging as it is right now. On the multifamily side, we hear a lot about “you can't pencil; it doesn't make sense to develop,” but the actual individual survey participants that we interact with are starting more development. So, on one hand, they point to the fact, “Oh, we don't think starts are going to increase,” but they're individually starting more developments. We hear it from the public too, that they're doing more development. I wasn't surprised to see the start of multifamily increase. I think everybody's got to get in before the supply is all worked through. So, they don't want to be the last guy who doesn't have any availability for the product. So that doesn't surprise me. But the single-family side did surprise us, and we don't think it will be sustained.
Willy Walker: Talk that through as it relates to multifamily. Clearly the performance that I talked about at the top of our discussion, that they have clearly disappointed this year, and one of the main reasons their stocks are down so much is because of the rent. The lack of rent increases that many people had projected the REITs would be benefiting from in Q2 of 2025. There is clearly, if you look at any slide as it relates to deliveries, an amazing absorption in the multifamily market. Q2 had record absorption, and on an annualized basis, over 750,000 units have been absorbed, which was way, way above what most people had projected as it related to absorption of the new supply that came online in ‘24 into ‘25. We're over 96% occupied in the public REITs, and yet we haven't seen the rental increases that many people had projected. What's your take as we roll forward from here, Ivy, as it relates to the supply burn off, the new development coming online, and the ability for multifamily owners to be, if you will?
Ivy Zelman: Well, given the 2Q results that were disappointing relative to your point about the re-acceleration of rent growth, I think our view is that it's coming. It's just a matter of time. It's slower than anticipated. We actually upgraded the space after the weak 2Q result. We still believe that longer term, over the next, call it, six to 12 months, we're going to work through that supply. Completions fell pretty substantially with the Census data release. And backlogs are up now, which has not been the case for quite some time. So, I think that the Southwest and Southeastern markets, Texas markets, those markets where supply is still elevated, lease-up competition is still pretty challenging. We weren't surprised that rents weren't reaccelerating. That's one of the reasons we remained cautious, and we felt the REITs were priced for perfection. So, it's going to take time, but our rent forecast for the multifamily is steadily improving between ‘25 to ‘27 and getting back to the trend line by ‘27. So, it's just taking longer, but they'll get there. And there are markets that are not laid in with supply that are seeing pretty substantial rent increases, in high single digits in some markets. So once that supply is worked through, given your point about absorptions, I think we're going to have inflationary pressure from rents again.
Willy Walker: You'd mentioned in your discussion on single family that the great COVID markets are now oversupplied and hurting and that the bad COVID markets, if you will, where people moved out of, are having sort of a heyday and have limited supply and therefore the ability to both sell existing inventory and sell it at a good price point. In your view, does that mirror the multifamily market, Ivy, or are there differences between single-family and multifamily as it relates to good COVID markets versus post-COVID markets?
Ivy Zelman: I think it's the same, pretty much. I mean, generally speaking, and, you know, one area that we haven't spoken about is SFR, because the single-family rental public companies are the only two that are out there, American Home for Rent and Invitation Homes. We're seeing a little bit more pressure on rents because there's a lot more product on the market, because more build-for-rent in those same COVID-winning markets are now putting pressure on their ability to lease at the rates that they were hoping to underwrite. So, I do think that COVID multifamily, single-family rentals, and for-sale are all experiencing the same dynamics. So, whether you're in the Northeast or the Midwest or in some of the California markets, you're seeing pretty good Pacific Northwest, where builders are not as concentrated. Those are the markets that are seeing the best rent performance and for-sale performance.
Willy Walker: It shocks me that SFR saw negative rent growth in Q2, just given the dynamics of the market. That just, if you sat there and said to me, “Okay, you've got pressure on single family sales because of X, Y, and Z, and you've a multifamily market that is oversupplied,” I'd sit there and say, “The consumer wants to be in a single family detached home, and if they can't afford the mortgage, they're going to move into SFR.” And yet we're seeing negative growth there. That's all just a supply and demand issue as it relates to oversupply in those markets, Ivy.
Ivy Zelman: I think so. I think if you talk to single-family rental operators that are on the same dynamics as the public companies are experiencing the same things; there are thousands of homes in many of these MSAs that are built for rent that they're competing with to get lease up. So, it's really not any different than multifamily. And rental rates, even though they're nowhere near a challenge on affordability, they're still rent to come are elevated. I think it goes back to the consumer kind of tapped out, but there also are a lot more choices out there. Now, if you were to meet with, let's say a broker in the Midwest, they would say, “We're holding in there or we're seeing some modest growth,” but they're still frustrated because they don't have enough inventory where someone would say, “I want to sell my home because I'm an empty nester, but where am I going to go?” I don't want to paint the picture that the rest of the country is doing great. It's still challenging because in those markets, there's still a lack of available product, and that's why you're seeing HPA still rising and rent still rising. So, if you're the beneficiary of owning a home and prices are still going up, or you're a landlord and rents are still growing in those markets, it's great, but the consumers in those markets are definitely the losers in those situations.
Willy Walker: When you say the consumer's tapped out, I remember Barry Sternlicht went to the Saudi Arabian Investor Conference just about two years ago, September of 2023, and sat there and said, “U.S. consumer is completely tapped out. We're watching credit card data, and credit card defaults are starting to go up, and we're going to see them spike, and the U. S. consumer's going to peter out.” Subsequent to that, I, as any good friend would do, have sent very much on a quarterly basis an update on where the consumer defaults are and consumer credit defaults are, and while they have gone up since immediately after the pandemic, they are actually back to normalized levels as it relates to both net charge-offs and delinquency rates for all the major credit card issuers. So, we actually haven't seen the U.S. consumer, if you will, hit the wall. And yet, at the same time, you're very clear in saying if the consumer was doing great, we'd have more home sales. We'd have more Home Depot sales. And you watch the entire ecosystem. What's your sense as it relates to whether we've gotten the inflationary pressures out of the market? Consumer credit is flowing very freely right now. You have the banks that are fully capitalized and extending credit both through mortgages as well as through credit cards. Do you think that we have some type of, not cliff event, but do you think the consumer is about to hit the wall, or do you think we kind of bump along here? What's your view of the consumer right now?
Ivy Zelman: Well, you know, we went back to our last Housing Summit. We looked at inflationary data going back to 2000. And when you look at the overall household income, it grew from 2000 through last year by 109%. And then you look at all other nondiscretionary categories, whether it be healthcare, utilities, or education, those were all up significantly more than that. The only thing was food, and food services were below where income was. So, I think where you say inflation is no longer an issue, I think my sister, who lives from paycheck to paycheck, is saying grocery prices haven't come down. Maybe they're not going up anymore, but they're not coming down. And when you look at mortgage delinquency data for Ginnie Mae, which is our first-time buyer, delinquency rates are rising much faster and higher than prior vintages. Coupled with those that had a student loan, there's 45 million that had student loans that no longer needed to be paid, federal student loans. And now those loans can't be extinguished through bankruptcy. And if you don't pay those student loans, your credit now is being negatively impacted. The credit bureau agencies are getting notified in ‘25 for the first time. And starting in September, wages are going to be garnished. So, I think that's going to have a bigger impact. It might have a bigger impact on those who are in rental housing than are in ownership positions because those owners at least have equity and other means they can borrow against their home, assuming they didn't buy last year. So, whether I say the consumers tapped out, I'm really referring to more subprime borrowers, those lower-end income borrowers that are living paycheck to paycheck. I think whether the credit data that we'll be talking about and showing in more detail at our housing summit is directionally going the wrong way for all categories, whether it's back to more normalized levels versus where it was during COVID, when we were throwing stimulus money and people were out spending and having a ball, we're now on the flip side of that. I just don't know where the magnitude of that plateau is, but it doesn't look good, especially the student loan crisis that I think we're going to have.
Willy Walker: In the student loan crisis, Ivy, most of those loans are guaranteed by the parents, not the actual student. So, as that kind of ripple through it, is that more of an impact on the baby boom generation, because the parents are the ones who have basically signed on the dotted line there versus the actual students? And therefore, wouldn't that there's this massive wealth transfer that everyone's talking about how there's I think the number I last heard was 90 trillion dollars of baby boom wealth that's going to move from that generation to the next generation over the next decade. And as a result of that is more of an impact on that generation, or is it actually the person who got out of college five years ago still has their student loans, is renting in wherever, and it's actually going to hit him or her?
Ivy Zelman: It's really interesting because I don't have the details in front of me. But first, on student loan debt, it's really across the age spectrum. We have people who are in their sixties who are in default. So, it's not just the students who have just graduated over the last several years. We'll give you more details on that once we go through it. But also, what's interesting is that 70% of the loans that are in default are for people who didn't finish their higher education. I think those people are more likely not to be homeowners based on just that data alone. But I do think that whether the parents guaranteed it or not, whether the wealth transfer can, assumingly, help offset some of those pressures, I would think that would have already happened. I know that it used to be that wealth transfers happened after people were no longer with us and they aged out, but that wealth transfer happens every day now for you and I, and paying for our kids to either rent an apartment if they're moving to New York City. I mean, what young adult can graduate from college and go rent an apartment in any major city in this country? So, without parents' help or substantial roommates, I think those headwinds aren't going to go away. And student loan debt in default is just another element of headwind that I don't think they've had to deal with today, whether they're a 25-year-old or they're a 62-year-old. I think we're going to feel that, and consumer spending will probably be impacted. And we look at things, like you mentioned furniture. We didn't talk about that. But when you look at the various furniture retailers out there, you know, they saw a nice bounce. The stocks saw a significant improvement since Liberation Day, and they've come off their lows. And we still see, like Restoration Hardware, seeing double-digit growth. And companies like Wayfair that are performing pretty well. So, you'd say, “Well, if the consumers tapped out, how are we seeing Wayfair doing well?” So, I think there are companies that are gaining share and others that are under pressure. So, it's not today, maybe the word tapped out is too strong, but I think we're going in that direction, and that's concerning.
Willy Walker: Talk for a moment about immigration. As we look at the two big major policies of the Trump administration, and there have been so many that to call two major ones, I mean, there's so much going on. But anyway, the two that we thought were going to impact the housing industry significantly was tariffs and immigration. Have you seen the immigration policy, the crackdown on the border, impacting either for-sale or for-rent housing?
Ivy Zelman: Not at all. We've heard about raids happening at job sites, and typically that they go looking for criminals and they'd go after one or two people. And that would scatter for a day or two, everyone who works on the job site. And that really pisses off the builders who are trying to get their development done or go vertical. But really, there hasn't been an impact. In fact, D.R. Horton was just talking about how they're getting relief on labor costs because it's so challenging. On the new home side of the equation there's more competition for that work. So, they have more people bidding for jobs, and there's actually relief on the labor side for the builders.
Willy Walker: That's so counterintuitive.
Ivy Zelman: I know we've been waiting for it, but it hasn't come to fruition.
Willy Walker: And as it relates to building products, and you all cover building products as well, sort of back to the comment that your sister said of while the cost of groceries is not going up at ridiculous levels, they're still elevated. As it relates to building products and the major components, timber and cement, and things of that nature, that is all normalized, but at a higher base level?
Ivy Zelman: Well, depending on the category. Certain categories are realizing price, but overall, we are seeing an upward trajectory in price realization for the building product companies that we follow and for those that we survey. So, their realization—somebody's getting hit with that. And that was where I went back to the Home Depots of the world, where they're starting to pass it through to their consumers because they're eating it from their vendors. And so, we are saying more pressure, but it hasn't resulted in anything material because their margins are still under pressure. So, they've had raw material prices that are coming down, transportation costs that are coming down, and so they've actually seen some margin improvement, and now they're chasing prices to get even further margin improvement.
Willy Walker: And on the home improvement sector, Ivy, one of the stats that Linneman tracks as a leading indicator of home sales is a tick up in home improvement sales, which then leads to people sort of putting a fresh can of paint on their home to then put it on the market. I actually took issue with that and said to Peter, “Given the number of people who have the lock-in effect on their mortgages, which you and I just talked about, isn't that home improvement actually just clean, making improvements because they're going to be there for another five or 10 years and not necessarily because they are trying to get it ready for sale?” What's your take on that? Is it either a leading indicator that people are going to start putting more homes on the market or actually they are souping them up because they're going to be there for another 5 or 10 years, because that, you know, 3.5% mortgage is keeping them locked into that home?
Ivy Zelman: I probably would say the latter. I wouldn't see it as a leading economic indicator for future sales. I think that people list their homes, then they start staging it because their realtor says, “Look, you've got to clean this house up. You've got to fix this. You've got to paint that.” So, it's almost within a month or two that they'll do the quick paint. They'll maybe change some flooring or stage the house, but usually pretty close to when they're listing or even when they'll list, and then they'll be told the reason you didn't get the price you want is that you need to fix your house up, and then they'll do it while it's listed. But more people are doing projects that are going to create value for the home, and they're staying longer. The one thing we didn't talk about, Willy, is that starting in 2030, we're going to see what, politely, the best way to politely say it is a lot more aging out, a lot of more inventory that's going to come on the market. I've been asked the question, who is going to buy those homes? If anything, there's a tremendous amount of product that will come to market, and if it's still not affordable, what's going to happen to pricing if all this product starts hitting the market and no one's there to buy it? Those are questions that I get a lot. And those are estate sales. On my street in Cleveland, there are two estate sales right now, and families are selling, and they're stubbornly saying, "I want more, " and the realtors are saying, "You don't understand the market, " and I'm like, “Show them our research.” So that's another headwind we need to start to, we're not that far away from 2013.
Willy Walker: No, we're not, and I would only add to that, flipping over to the commercial side, one of the things that I've been very focused on recently is that because of where the yield curve is, all of our lending right now is five-year paper. And historically, we've been the average term in the past. Well, for as long as I've been in this industry, for over 20 years there have been seven and 10-year mortgages and predominantly 10-year mortgages. And we're right now almost exclusively doing five-year mortgages. And what we're generating right now is a refi wave for 2029 and 2030 that is building by the day because all the 2019 and 2020 mortgages are still sitting out there with a 10-year term. And now we're adding on top of that tons of five-year papers. If you look at what's just in the multifamily space, Fannie and Freddie right now, 2029, they have $138 Billion of their own books that refi in 2029. Well, if they keep adding on five-year paper in ‘29 and ‘30, you're going to get so much refi that they won't even come under today's current lending capacity that both Fannie and Freddie have. And they likely will go private between now and then, and whether they have annual allocations as far as what they can lend on multifamily or not in the future is anyone's guess right now. But without a change to it, they will barely have the ability in their annual allocations, as it relates to lending capacity, to be able to refi their own portfolios, much less go out and do something else. So that refi wave is building quickly, given everyone is borrowing at five years right now, rather than ten years as we've historically been lending.
Ivy Zelman: Well, hopefully it'd be good for Walker & Dunlop's business.
Willy Walker: That's it. I mean, look, that's two bites at the apple over five years rather than one bite at the apple over 10 years every five years. But we shall see. Two final things for you, Ivy. The first one is, given the overall landscape, where is AI either having or going to have the biggest impact? And then the second and final question to you is, we've talked about all the industries, if you had to put a dollar in one of those today, which one do you put the dollar in?
Ivy Zelman: Well, first question, again, tell me quickly, because I was anticipating your second question. So, what was the first question?
Willy Walker: First one was AI, where does it have the biggest impact? Is it in the brokerage business? Is it in the lending business? Is it all in the manufacturing business? Who has either already started to implement AI or has the opportunity to implement AI that could dramatically change one of the verticals in the housing industry?
Ivy Zelman: Well, I think most companies are right now exploring how to utilize AI to create efficiencies, and you probably see it, whether it's customer service, sales, where they can utilize AI bots and take humans out of the equation. And they don't want to say this on conference calls that they're anticipating headcount reductions, but you hear a lot on customer service sales associates. That's where you'll see the improved efficiencies or reduction in headcount. I think they're exploring it. The Mortgage Rocket is a great example of a company that's really utilizing AI, and I think you'll see more from them. I don't think the entire mortgage industry is benefiting as much as Rocket, though. I think Rocket is leaps ahead of everyone else because they've been making investments. I think companies like Lennar have talked a lot about their opportunities with AI and even finding ways to go backward into land development and different areas to find uniformity and costs that they never could analyze before. So, I think there'll be opportunities, but I'm not so sure that we'll see anything manifest itself within the next year or two. It goes so fast, I could be wrong, but I worry more about our ecosystem. What's going to happen to those people who are displaced if there are substantial headcount reductions, and where are they going to go? And the answers I get offline are like, “Well, we reinvent; we've always done that. In the industrial revolution, we'll reinvent ourselves.” So, a lot of recent AI podcasts and such, and people that I'm sure you've spoken with that have some theories, but the home builders tend to be the last. A lot of builders will say, or build product companies, like, “I don't need to be a leader; I'll be a follower here.” So those that are, tend to be more of the leaders, like Lennar, I think, you know, there's others that are kind of following suit or being a little quieter about it. It's going to be on the front line, for those that're interacting with consumers and dealing with, whether a digital experience or they're coming in doing, right now, virtual tours. How they are eliminating headcount will be the biggest efficiency that they create, I think.
Willy Walker: And then finally, across the covered sectors, where do you put in your $1?
Ivy Zelman: I think you're going to be surprised, but I think that we would probably lean toward multifamily right now. I think there are a lot more opportunities for multifamily operators and developers to accelerate rent increases. Once the supply is really worked through, assuming we don't see continued skyrocketing supply on the start side, but you know, I think affordability for the first-time buyer for builders is going to remain stretched. I don't think I gave this stat, but if you were to buy the median-priced home with the non-supervisory employees' single income, and you had to pay property taxes, homeowners' insurance, principal, and interest, to buying that median-priced home would be 60% of your income, single income. That is the highest it's been since the early 80s. So, we need to see that dramatically improve before we get the for-sale market, for at least the first-time buyer market, really getting any traction again. So, I'd lean toward the rental market.
Willy Walker: Hard to believe, Ivy, that it was five years ago, almost right now, that you and I did our first one of these.
Ivy Zelman: I remember you called me. It was like March 20th. You're like, “I'm starting this webcast,” and look at you now.
Willy Walker: That's incredible.
Ivy Zelman: How many webcasts have you done since that first one in March?
Willy Walker: Oh, I don't know. Someone will tell me 250 some odd. I don't know. 18 million views or something. But you know what? If I take all the ones that you've been on, you're well over a million of those. So, it's just great.
Ivy Zelman: Thanks for your knowledge in my space. I don't know if you got a cheat sheet over there, but I'm very impressed.
Willy Walker: I will say that Mark from your team and Tristan from our overall market analytics team were very helpful in pulling together a bunch of data for me on this to give me some ideas to talk to you about. So many thanks to Tristan and to Mark for that. Thank you, Ivy, for spending time with me today. And thank you to everyone who joined us. And I hope everyone has a great day.
Ivy Zelman: Take care. Thank you.
Willy Walker: Thanks, Ivy.
