In her keynote presentation at the 2021 Wisconsin Real Estate & Economic Outlook Conference, Ivy Zelman, CEO, and Co-Founder of Zelman & Associates gave a contrarian forecast for the housing market in her presentation titled “Zelman believes that the US is overbuilding single-family homes and she backed up her view by citing slowing household growth, an aging population, influxes of speculative development, and inflated asset prices due to economic inflation and low-interest rates.
Much of Zelman’s perspective is based on the unfavorable demographics for the US housing market. The growth of new households has steadily declined in the last few decades, as many 20-39 year old’s are holding off on marriage or living with parents. Additionally, Zelman believes that declining fertility and an aging population are causing this decline. Zelman likened the US population to Japan, a country with consistent declines in housing starts for the past five decades.
Wisconsin Real Estate & Economic Outlook Conference Video Presentation Links
· Keynote 1: Ivy Zelman, CEO, and Co-Founder of Zelman & Associates: “Peering into 2021: What’s happening with Housing Inventory and Homebuilding?”
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View the Slides »
· Panel Session 1: Supply Issues & Residential Housing Inventory; Challenges & Opportunities
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· Keynote 2: Lopa Kolluri, Principal Deputy Assistant Secretary for the Office of Housing and FHA
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· Panel Session 2: Race & Housing: Knowing the Past to Envision the Future
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In addition to demographics causing a bearish demand outlook, much of the current demand is non-primary and is coming from people looking to buy investment properties or second homes. Single-Family Rental is a growing institutional asset class, and large real estate investment firms have been heavily deploying capital into the sector. Currently, there are $63 billion of capital being deployed into Single-Family Rental; $48 billion of which has yet to be deployed as “dry powder”. This deployment of capital will increase home prices dramatically, as these firms will be able to out-bid primary buyers.
Increases in supply costs and lead times are pressuring homebuilders to build faster than demand can keep up with. With supply chain shortages and economic inflation, builders would rather build now than wait for prices of materials and supplies to rise. Zelman believes that this is causing an unsustainable amount of speculative development, in addition to the influx of capital from institutional investment firms.
With low primary demand and significant speculative development, Zelman makes the argument that supply is outpacing demand. Housing starts to orders are at 114%, meaning that there are 114 homes being built for every 100 orders for new homes. This is 16% above the decade average. When looking at normalized demand, single-family home starts are 21% above demand.
The arguments Zelman presents a conflict with the conventional view of absolute inventory, as inventories of homes are at record lows. However, Zelman believes this is not a clear view of the market as much of the demand is driven by secondary buyers. In addition, inventory turnover is trending downward after extreme highs and is driven by record-low interest rates. With the prospect of rising interest rates in the next decade, Zelman predicts that turnover will decline back to normalized levels once rates rise.