Zelman on the Housing Zeitgeist

Episode Summary

Executive Summary: The episode centered on a deeply cautious outlook for U.S. housing. Ivy Zellman argued demand is weak, inventory remains historically tight in many regions, builders are cutting prices and starts, and 2026 could bring modest volume gains but flat-to-lower home prices. Regional shortages in the Northeast/Midwest contrast with oversupplied Sunbelt markets, while student loan stress, insurance costs, and AI-driven labor changes may further weigh on housing and the broader economy.

Main Topics: Housing demand deterioration (Priority: 5/5): Zellman argued spring selling season was a bust, confidence is fading, and affordability remains stretched, especially for first-time buyers and move-up/luxury buyers. Inventory shortages and regional divergence (Priority: 5/5): Existing-home inventory is still near troughs nationally, but the market is highly bifurcated: the Northeast and Midwest remain undersupplied while the Sunbelt has much more inventory and weaker prices. Builder incentives, price cuts, and new-home weakness (Priority: 5/5): Builders initially used mortgage-rate buydowns effectively, but now are offering deeper incentives and outright price cuts as demand softens and standing inventory rises. Supply-side pullback in construction (Priority: 4/5): Single-family starts are expected to decline further, while multifamily may recover as backlog burns off and rents re-accelerate in underbuilt regions. Tariffs, immigration, and labor/material costs (Priority: 4/5): Tariffs have had limited direct impact so far, but builders face cost pressure from land, regulation, and potential labor constraints; these could become more important if construction weakens further. Affordability, insurance, and student loans (Priority: 4/5): Higher insurance costs, stretched monthly payments, and student-loan delinquency are adding stress to would-be buyers and may reduce housing demand further. Broader economic and AI risk (Priority: 3/5): The conversation linked housing weakness to softening labor markets and possible AI-driven job reductions, which could amplify housing and consumption headwinds over time.

Key Arguments: Demand is weaker because consumer confidence has fallen and affordability is near the most stretched level since the early 1980s, limiting first-time buyer qualification. Inventory is still historically low overall, but supply conditions vary sharply by region, explaining why prices are rising in the Northeast/Midwest while weakening in the South and West. The mortgage-rate lock-in effect remains a major drag: many homeowners are locked into sub-5% loans and are reluctant to give them up for today’s near-7% rates. Builders have shifted from 3-2-1 buydowns to much more expensive permanent rate buydowns and direct price cuts, especially on standing inventory, to keep absorption moving. New-home sales are under pressure because even aggressive incentives are no longer enough to offset weak affordability and consumer caution. Housing starts are expected to fall further in single-family, reflecting builder retrenchment and weaker demand, while multifamily may recover in non-Sunbelt regions as supply there tightens. Tariffs have not yet meaningfully raised builder costs because firms can source alternative vendors and market weakness limits pricing power for suppliers. Student loan delinquencies are beginning to damage credit scores and are already causing some mortgage contract fallout, threatening demand for big-ticket purchases including homes. AI-related job displacement may matter less as an immediate shock than as a gradual drag on hiring, income, and confidence, but it adds downside risk to housing demand. Despite weak demand, prices can still rise where supply is extremely constrained, showing that inventory scarcity is dominating price formation in many markets.

Data Points: Existing home sales (annualized): about 4.0 million - Recent May data discussed as a slight improvement, but still weak historically. Pending home sales (annualized): about 4.06 million - Slightly up in May, suggesting modest improvement but no strong rebound. New home sales (annualized): about 600,000+ - Described as a surprise, still weak in absolute terms. Total existing + new sales (annualized): about 4.75 million - Zandi said this level is near global financial crisis territory. Mortgage holders locked below 5%: 73% - Illustrates the mortgage-rate lock-in effect suppressing existing-home turnover. Mortgage holders locked below 3.5%: about 40% - Shows how deeply embedded low-rate mortgage holdings are. 30-year fixed mortgage rate: just south of 7% - Used as the current financing environment inhibiting mobility. Average outstanding mortgage coupon: close to 4% - Creates a near-3 percentage-point gap versus new borrowing costs. Existing-home and total inventory: about 20% higher nationally than trough - Still very low relative to history and below 2019 in most markets. Sunbelt listings growth: up 50% to 100% in some markets - Shows fast inventory buildup in some weaker regions. Single-family starts forecast: down 9% next year - Zellman’s outlook for further single-family construction weakness. Current single-family starts decline timing: 9% decline starts this year - She corrected the timing during the discussion. National house-price forecast (Zellman): down about 1% in 2026 - Expected under a soft-landing, no-recession scenario. Moody’s Analytics house-price forecast: basically flat nationally - Zandi referenced his firm’s estimate as a comparison. Homeowners insurance share of monthly payment: more than 4% - Up from about 2% historically, worsening affordability. First-time homebuyer average age: 38 - Adam’s stat game highlighted delayed entry into homeownership. First-time homebuyer earlier norm: 31-32 - Reference point showing how much later buyers are entering the market now. University of Michigan 1-year inflation expectations: 5% - Marissa’s stat game; the largest monthly decline in the series history was discussed. Change in UMich 1-year inflation expectations: -1.6 percentage points - Fell from 6.6% to 5.0% in one month, the largest drop ever. Existing-home inventory ratio: 1.2% of households - Ivy’s stat game answer: existing homes for sale as a share of households, near all-time lows. Typical inventory ratio: about 2% - Zellman said trendline would be roughly two percent or a bit more. Continuing unemployment claims: 1,974,000 - Adam used this as a sign of labor-market softening. Student loan delinquency rate: 9% - Zandi noted delinquency is at a record high and expected to rise further. Builder pricing to stimulate demand: as low as 3.99% mortgage buydown / 3.49% mentioned as possible - Examples of increasingly aggressive builder incentives on new homes. Builder cost of a 3.99% buydown: 11-12 points - Zellman said this is very expensive for builders to fund. Builder survey cost growth: 1.8% - Survey of roughly 20% of the new-home market showed modest cost increases. Lenar stick-and-bricks costs: down 3% - Example cited to show some builder input-cost relief or negotiation power.

Pivotal Quotes: "We think 26 will be a challenged year with respect to price." — Ivy Zellman: Her core forecast for 2026: modest volume improvement but continued home-price pressure. "I've never seen the divergence between the demand of units being at trough levels or close to recessionary levels, yet home prices are rising." — Ivy Zellman: She emphasized the unusual disconnect between weak transaction demand and still-rising prices due to inventory scarcity. "The market is, as with the housing market, very bifurcated." — Adam Kamens: He summarized regional differences in prices and rents driven mainly by supply conditions.

Implications: Housing looks set to remain a drag on growth: sales are weak, prices may soften, and regional disparities will widen. Builders and investors should expect more incentives, selective price cuts, and slower starts, while policymakers may need to watch affordability, student debt, and labor-market risks.