Peak Housing

Ivy Zelman, Zillow and Record Home Construction Flash Warning Signs

“Which Kool-aid are you drinking?” Ivy Zelman asked Toll Brothers CEO Bob Toll on the 2006 fourth quarter conference call after he touted pending sales.

Ivy Zelman is one of the best housing analysts on the planet. Her record is simply exceptional.

When I started buying foreclosed homes in 2009 and ramped up purchasing in 2011 and 2012, I felt very excited but lonely. Everyone, it seemed, was bearish on housing. Everyone that is except Ivy Zelman. She was bullish not only on housing in general, but on my industry at the time, single-family rentals.

But being bullish when everyone was bearish was not even her best call. She called the top in housing in 2005/2006. The quote that leads this post was a shocking one at the time. She was ridiculed for it but ended up being spectacularly right.

Well, we’re hearing from Ivy Zelman again and this time she is warning that the near limitless demand for housing might be a mirage.

“The perception that housing is drastically undersupplied and that a strong demographic picture lies ahead is creating a false sense of security,’’ according to a report by Zelman’s firm entitled “Cradle to Grave.’’ “By our math, both single-family and multi-family production are already ahead of normalized demand and estimates of a housing deficit are grossly exaggerated.’’

And there is evidence for this when considering the news that Zillow was recklessly buying homes; something that I knew personally very well. They made me an offer on an investment home I owned that was simply too good to turn down. At the time I tweeted about it:

After reporting hundreds of millions of dollars of losses and that Zillow was shutting down its home buying operations, New York Times featured me in an article.

But more important than artificial demand from corporate iBuying is that demographics which for many years were in housing’s favor will start to turn against the housing market:

“Population growth — the crucial underpinning of future housing demand — is on a troubled trajectory,” the (Ivy Zelman) report said.

And on the supply side, construction is dramatically ramping up. There are more single-family homes under construction than at any time since 2007 and there are more apartment units under construction since going back to 1974!

CalculatedRisk Newsletter
Most Housing Units Under Construction Since 1974
From the Census Bureau: Permits, Starts and Completions Housing Starts: Privately‐owned housing starts in October were at a seasonally adjusted annual rate of 1,520,000. This is 0.7 percent below the revised September estimate of 1,530,000, but is 0.4 percent above the October 2020 rate of 1,514,000. Single‐family housing starts in October were at a rate …
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Or what about this tweet?

It is hard see all of these homes under construction hitting the market because of delays in the supply chain, but trust me they are on their way.

And all of this is happening with record low mortgage rates. What happens if interest rates rise?

“Rates matter,” said Zelman. “We think the market has been juiced.”

Do I think the housing market is on the verge of collapsing?

No.

But I do believe we are seeing all kinds of warning signs that we are very close to the top. My best guess is that in the next 12-24 months, we will start to see more and more signs of supply and demand aligning and some pockets of weakness. And longer-term weakness or oversupply in housing has very important implications for not only the US economy but the world. I’m a firm believer that the US housing market drives the US and world economy. Slower growth will follow any weakness in housing.

How am I using this news? I’ve been selling residential investments and I plan to exit most of the rest of my residential real estate exposure in the next 6 to 12 months.

Investors should know by now to ignore Ivy Zelman at their own peril.