Ivy Zelman: Housing Market Downturn Isn't Over

Episode Summary

Executive Summary: Ivy Zellman argued U.S. housing is surprisingly resilient despite 7% mortgage rates because existing-home supply is locked down by low-rate mortgages, new homes are gaining share through incentives and buy-downs, and demographics/wealth transfers still support demand. She sees price growth near flat, multifamily fundamentals weakening, and climate/insurance risks plus tighter credit as key future headwinds.

Main Topics: U.S. single-family housing resilience (Priority: 5/5): Housing transactions are down, but inventory remains record tight and demand is supported by job growth, wage gains, and mortgage-rate lock-in among existing owners. New-home market share gains (Priority: 5/5): Builders are outperforming the existing-home market by offering mortgage rate buydowns, move-in-ready inventory, and more favorable supply conditions, allowing them to capture demand. Multifamily slowdown and distress risk (Priority: 5/5): Apartment rent growth is normalizing sharply from unsustainably high levels while higher financing costs, refinancing needs, and a backlog of supply are pressuring valuations and operators. Macro, demographics, and migration (Priority: 4/5): Population aging, lower birth rates, declining immigration, and slower mobility reduce long-run housing demand, while post-COVID migration patterns continue to reshape regional winners. Banking and credit exposure (Priority: 4/5): Regional and community banks with CRE exposure face rising risk, especially in office, though multifamily is seen as less dangerous than office within commercial real estate. Climate and insurance as housing constraints (Priority: 4/5): Rising homeowners insurance costs, insurer exits, and physical climate risks may shift demand away from exposed markets like Florida, Arizona, and California toward the central U.S. Valuation of homebuilders and building products (Priority: 3/5): Homebuilders remain financially stronger than in prior cycles, but stock valuations already reflect optimism and could compress if ROE and margins continue to fall.

Key Arguments: Housing has held up better than expected because existing-home owners are locked into very low mortgage rates and are unwilling to move. The new-home market is taking share because builders can offset affordability with mortgage-rate buydowns and have more inventory available. Rising mortgage rates did slow housing in 2022, but strong jobs, wage inflation, and record-low supply prevented a deeper national price decline. The post-2020 housing boom was large, but not unprecedented relative to prior run-ups in some markets; certain MSAs doubled or tripled. Unlike the 2004-2007 bubble, today’s market is constrained by Dodd-Frank and qualified mortgage rules, so lending is far safer. Multifamily rent growth has already peaked and is expected to normalize to low single digits, creating pressure on returns and transaction volumes. Higher interest rates and weaker fundamentals could force more distress among undercapitalized multifamily owners and developers. Demographics are becoming less supportive as population growth slows due to aging, lower birth rates, and reduced immigration. Homebuilders may reaccelerate speculative starts if recent sales remain strong, but they are unlikely to repeat the extreme oversupply of the mid-2000s because of infrastructure, land, labor, and municipal constraints. Climate risk and insurance availability may become a major housing allocation factor over the next several years, favoring less exposed regions.

Data Points: Annual housing transactions: ~5+ million - Current U.S. new plus existing home sales versus a historical level closer to 6+ million. Mortgage rate lock-in: Over 90% below 5% - Share of consumers with mortgages below 5%, limiting existing-home turnover. Very low mortgage cohort: Over 50% below 3.5% - Large share of homeowners have ultra-low rates, making moving financially unattractive. New-home market share: 15% to 20% of total transactions - New homes are gaining share versus pre-pandemic levels near 10%. Pre-pandemic new-home share: ~10% - Baseline before share gains accelerated. Inventory available for sale: ~1 million homes - Approximate current housing inventory versus about 2 million at the pandemic peak. Housing pricing vs trend: 20% to 25% above historic trend line - Affordability remains stretched even after rate increases. Wealth transfer: $80 billion to $100 billion - Estimated transfer from Xers/Boomers to millennial and Gen Z children supporting down payments and purchases. Multifamily blended rent growth (historical normal): 2% to 4% - What operators historically considered strong performance. Multifamily new move-in rent growth (2023 peak examples): 10% to 14% - Some markets saw double-digit new lease pricing before deceleration. Multifamily renewal rent growth: High single digits - Renewals remained elevated during the boom period. Multifamily occupancy: 95% to 96% - Normalized tight occupancy referenced by the speaker. Multifamily supply backlog: Nearly 1 million units - Units in the pipeline needing completion, adding pressure to rents and pricing. Multifamily transaction volume change: Down 70% to 80% - Buying and selling activity in the multifamily market has fallen sharply. Multifamily values change: Down 20% to 40% - Depending on market, asset values have been repriced significantly lower. Forecast multifamily rent growth 2023: Just under 4% - Expected full-year blended rent growth for 2023. Forecast multifamily rent growth 2024: 1.6% - Expected rent growth to fall further in 2024. Shelter share of CPI: ~40% - Speaker cited shelter as a very large component of inflation measures. Builder median price-to-book: 1.7x - Current weighted market-cap median valuation for homebuilders. Historic normalized price-to-book: 1.25x to 1.3x - What the speaker considered a more normal valuation level. Homebuilder returns on land/invested capital: 20%+ to 25% - Returns achieved during the strong 2021-2022 period. Homebuilder earnings decline: 40% to 70% - Earnings fell in 2022 into 2023 due to margin pressure and slowdown. Single-family rental ownership: 33 million homes owned by investors - Estimated investor-owned single-family homes, mostly mom-and-pop rather than institutional. Institutional share of investor-owned homes: Less than 2% - Most investor-owned SFR stock is not controlled by large institutions. Move rate age 18-24: 50% per year - Younger households are far more mobile. Move rate age 55-64: 7% to 8% per year - Older cohorts move much less, slowing mobility and turnover. Population growth outlook: Roughly cut in half in 2020-2030 - Speaker expects slower household and population growth going forward.

Pivotal Quotes: "It's been surprisingly resilient." — Ivy Zellman: Her opening characterization of the U.S. housing market in summer 2023. "We have over 90 percent of consumers locked in below five percent." — Ivy Zellman: Explaining why existing homeowners are disincentivized to move despite 7% mortgage rates. "We are not going to weather this normalization or this Fed tightening cycle without some pain." — Ivy Zellman: Her bottom-line macro view on housing and the broader economy.

Implications: Housing is likely to stay flat rather than crash, but higher rates, tighter credit, and climate/insurance costs will pressure returns, slow transactions, and widen regional winners and losers. Multifamily and certain CRE pockets look most vulnerable.