Ivy Zelman: Housing Demand “Grossly Exaggerated”

The hot housing market has been attributed to historically low-interest rates, Millennials reaching homebuying age, and a desire for spacious living created by the pandemic.

Across the industry, experts agree that all of this has been exacerbated by a shortage of houses that started with underbuilding in the aftermath of the 2008 financial crisis.

Everyone except Ivy Zelman, the housing analyst who foresaw the financial crisis in 2005. In a report, her firm, Zelman and Associates, claims that housing demand is overblown and that the country is already on a path to building too many houses.

“The perception that housing is drastically undersupplied and that a strong demographic picture lies ahead is creating a false sense of security,’’ the report reads.

“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.’’

Underbuilding has been public enemy number one throughout the affordable housing crisis.  Freddie Mac estimated the U.S. is short 3.8 million housing units, while the National Association of Realtors (NAR) suggested the U.S. needs 6.8 million more homes to meet buyer demand.

But Zelman says any predictions of real demand are flawed because there are so many new types of buyers in the market. Private equity firms are buying and building properties to rent out. iBuyers upset the traditional buying process by using algorithms to make purchases quickly.

In this landscape, Zelman argues, making claims of future demand is a bad bet. If the market continues building at its current rate, rising mortgage rates and an aging population may coincide with an oversupply of homes, leaving inventory unsold.

Dennis McGill, director of research at Zelman & Associates, has also pushed the viability of the firm’s report, citing data from the Decennial Census which shows household formation is down 24% over the last four decades.

Zillow’s decision to shutter its iBuying arm, Zillow Offers, has given Zelman’s prediction a boost. The company cited “unpredictability in forecasting home prices” in the wake of Offers losing $381 million last quarter, and said it would focus on renovating and selling its backstock of inventory.

That inventory, which currently includes 9,800 homes across the U.S. and another 8,200 under contract, has already grabbed the attention of private firms interested in renting them out.

Zelman sees this trend as particularly troubling for the market.

“All this price war and bidding, how much is it being inflated by iBuyers basically bidding against the teacher, the fireman, the policeman?” she said, citing Phoenix, Austin, Dallas, and Houston as especially risky market due to the number of investment firms buying property.

But Zelman’s prediction goes against those of most other industry experts. Both NAR and the Mortgage Bankers Association maintain that the housing market will remain hot through 2022.

Lumber company Weyerhauser’s CEO Devin Stockfish recently told CNBC he expects  “we’re going to have to build a lot of homes here over the next five or 10 years to house the demand level that we have here in the U.S.”

“First and foremost, it all goes back to the level of underbuilding that we’ve been doing in the U.S., really going back to the last Great Recession,” he said.