“I think that there’s risk that these investors are being misled.”
Ivy Zelman became famous on Wall Street when she correctly called the housing market top in 2005… and almost lost her Wall Street job because of it. She created her own company and then correctly called the housing market bottom in 2012. After that, she was bullish on housing until last year.
Last summer, her housing market research and investment banking firm, Zelman & Associates, came out with a bearish report that cemented her reputation as one of the most independent – and sometimes most contrarian – housing market analysts in the U.S. housing industry.
Her disagreement with the rest of the housing industry is extremely basic.
- The industry thinks there’s a huge undersupply of housing.
- Ivy Zelman thinks there’s an oversupply.
She sees an oversupply of housing coming because of the industry’s miscalculations and sales pitches which have led investors to spend massive amounts of money on buying new and used single-family houses.
Pipeline of Households vs. Pipeline of Houses
“Even if rates don’t go higher, the question is where are all the bodies coming from that are going to fill up all these homes? And not just the ones in the existing market but all the ones in the pipeline that are being constructed or in the development stages that will need also to be filled up, as well as, the multifamily development that we’re seeing – which, by the way, multi-family development is just as hot as single-family rental development – and both of which have backlogs. For multi-family, they’re the highest that they’ve been since 1974. Which really about four or five years ago shifted from being urban development to suburban development. And then marry that with the development in the Build-for-Rent space which has been fueled predominantly by the perception that we have a need for more units. That is really compelling a lot of institutional capital into the space.” Start video at the quote.
2nd Half of 2021 – Primary-Home Buyers Decreasing, Investor Buyers Increasing
“I think that we continue to see an acceleration in more speculative transactions, more investor-oriented transactions, whereas we see primary demand is already moderating. And we can see that by the number of renters that become homeowners has moderated substantially from an initial surge that I think was really a pull forward of demand given the dynamics of the Covid backdrop and fear that did pull people that would have probably been happy to stay as renters for various reasons, pulled them into home ownership. So we saw a big spike and in 2021 we started seeing a moderation of that renter conversion to homeowner but yet the market actually, in the second half of 2021, accelerated and strengthened. And we believe that that’s being driven by investors.” Start video at the quote.
Why the Surge in Investors Buying Single-Family Houses?
Inflation & Diversification
“Well, you know the argument is inflation. Real estate’s a great hedge on inflation. So, if you buy now and inflation is surging then you’ll be protected because your asset will increase alongside inflation. So, I can understand why the individual is looking for alternatives because the stock market feels – even though the correction we’ve had – feels frothy. Crypto’s frothy. What isn’t frothy right now? What doesn’t feel like it’s a bubble? So people are trying to hide and real estate seems like a better hedge than other asset classes, at least the rezi [residential] piece.” Start video at the quote.
Profitability… Based on Presumed Rents
“When we look at the acceleration that we saw in 2021, we really attribute that to the free money, to the mortgage rate being so compelling that you can buy an asset and rent it out and get a cash-on-cash return that you perceive is better than what you’d otherwise get buying fixed income securities. So there’s still momentum being driven by yields that appear to be attractive based on the presumption that you can rent those units out and that is a pretty big presumption.” Start video at the quote.
“We’re hovering at levels of rent growth that are just unprecedented frankly in the history of our single-family rental survey, so that is fueling investors’ optimism… that I can go buy, whether it’s, I’ll call it an investment property – or a second home and rent it out when I’m not using it – those are really drivers that are propelling more momentum right now and the only thing that really changes that is if the cost of capital goes up.” Start video at the quote.
Increasing Wealth & Wanting to Diversify
“You think about the wealth creation in the stock market that, you know, the S&P’s up 30% in 2021. Couple that with the amount of wealth created from cryptocurrency, [house price] appreciation, there’s a lot of money sloshing around, in addition to all the excess that was received from federal and monetary policy, basically. I do think the momentum is really a combination of that significant wealth creation – that people are looking to diversify outside of just equities and crypto. What else better to do than take my profits and maybe diversify into residential real estate.” Start video at the quote.
Build-for-Rent – Private Investors
Ivy tells the story of one homebuilder guessing that 20% of their new home buyers were private investors.
“And I think that is right now like what a lot of money managers are hearing from their clients, that they’re looking to take some chips off the table, diversify, and that really started to accelerate the level of investors, private investors.” Start video at the quote.
Build-for-Rent – Institutional Investors
“I think that the incremental buyer today, especially the non-primary buyer, is really out of the loop in terms of the returns that are being promised. We have high net worth investors – country club investors – these Build-for-Rent funds go and raise money with, and promise them, ‘I’m going to get you an unlevered return in high single, double digits levered return. Invest in this fund, it’s going to be completely safe. You’re totally in a defensive position. Don’t worry.’
And now they actually have to go do it [buy the new houses and lease them out]. And the question is, when does the investor find out? Is it three quarters later in a statement that says, ‘Oh, our returns didn’t materialize.’ So then you start to see things really potentially at risk of unwinding faster.” Start video at the quote.
“I think that there’s risk that these investors are being misled.” Start video at the quote.
Be Cautious About Diversifying Into Expensive Houses
“I don’t think we have a cycle risk like we did in the last downturn because of all the equity that’s in – the skin in the game – but I would be more cautious about investing, kind of across the board, as a way to diversify, at the level of price appreciation that we’ve seen. I would be more cautious.” Start video at the quote.
Ivy Zelman’s Current Assessment of the U.S. Housing Market
“I’d say that overall it’s extremely robust and not sustainable. I think we’re at a peak.” Start video at the quote.