Ivy Zelman, CEO and co-founder of Zelman & Associates, speaks with “The Sherman Show” hosts Jeffrey Sherman and Samuel Lau on the state of the multifamily and single-family housing markets and her outlooks for these asset classes. Founded in 2007, Zelman & Associates provides research, analysis and advice about the U.S. housing market and related sectors to investors and business leaders. This edition of the podcast was recorded Oct. 12, 2020.
Of the various housing subsectors, single-family housing is where Ms. Zelman sees the most-attractive investment opportunities. She is not advising investors to put capital into multifamily housing.
Single-family housing is not without risks. Ms. Zelman is starting to see topping signs in some areas where builders are buying land at prices that don’t pencil out. While C-suite executives in housing-related businesses foresee “several years” of growth, she says her firm expects “year-over-year declines in existing-home sales, declines in new-home sales and housing starts” in 2022. “Builders right now are aggressively raising prices. They’re buying land more aggressively. And it just feels like something could go wrong. But the whole contingency is rates, in my opinion. Rates stay low, we’ll probably start to see some relative slowing in 2021 or 2022, but the builders might push too far in price, and that could slow things down even faster.”
Ms. Zelman warns that some investors are acting on a bullish big-picture view without understanding “the local market dynamics. There’s plenty of bad investments being made because they’re just assuming that everything is sort of universal,” and they’ll “have the benefits of the overall market – and that’s just not the case.”
Ms. Zelman draws a sharp contrast between extremely tight single-family inventories and overbuilt multifamily inventories as well as the demographics of those subsectors.
The inventory of single-family homes for sale as a percentage of total households is about 1.2% versus a 30-year average of 2% and a peak of 3.5% during the Great Housing Bust. “That’s one of the reasons we thought, even in a great recession that we were faced with in March, that home prices could still increase – even in the face of double-digit unemployment. But now what we’re seeing is that despite unemployment being so high, with so many people being able to work remote, having their kids at home, learning online, they have a lot more flexibility and a lot more options. So the states that have been the winners are growing even more than they had been because of this new dynamic.”
The inventory for multifamily housing,” she notes, “is now in backlog at an all-time, multidecade high. That was prepandemic. Now we layer on a substantial recession, and we look at urban cities that are hit the hardest, and people can work remote. And you’re seeing that supply is still there and still going forward. I think it’s kind of been a nightmare for those urban multifamily owner-operators that are dealing with so many headwinds that were prevalent pre-COVID.”
Among those headwinds, she notes, is a demographic shift. The primary demographic cohort for multifamily housing comprises people between the ages of 20 and 34. The growth rate of this population is slowing and will turn negative in the second half of this decade. As people enter the 35-to-44-year cohort, they form couples, have children and migrate to single-family homes.
The movement toward work from home, while accelerated by shelter-in-place regimes due to COVID-19, marks a durable shift in the use of housing, according to Ms. Zelman. This change, she says, will add more momentum behind a years-along movement out of urban centers to suburban and exurban areas as well as from states with higher housing costs and taxes to states with more affordable housing markets, lower taxes and more favorable climates.
For example, she notes that over the last decade, populations of Idaho, Utah, Texas, Nevada and Florida grew at 15% to 20% average rates versus growth rates of less than 3% in New York, Connecticut, Illinois and Pennsylvania. “Now with the sea change from remote work,” Ms. Zelman says, “I think you’re only going to see that great shuffle accelerating.”
The Nov. 3 presidential and congressional elections could introduce another accelerant. “If we do get a Democratic sweep, I think we’re going to see higher taxes,” she says, with the impact on discretionary spending felt most heavily in high-cost states. In that event, she says, “I think you’ll see more people decide to pick up and leave some of these markets.”