This Real Estate Pro’s Surprising Predictions for the Housing Market. Plus, Her 6 Top Stock Ideas.Ivy Zelman is bullish on builders. Why she favors the “move up” market.
By
Shaina Mishkin
Updated October 11, 2024 / Original October 10, 2024
America’s housing-affordability crisis has been years in the making and won’t be easily undone, no matter that the Federal Reserve is cutting interest rates and politicians are floating remedies.
Mortgage rates have fallen from recent highs but are still double their pandemic level. The number of homes for sale is at a four-year record, yet existing-home prices keep rising. Shares of home builders are also near a peak, a verdict on the industry’s rosy outlook.
To make sense of this extraordinary backdrop and learn where the market is headed, Barron’s checked in with Ivy Zelman, executive vice president of the real estate research firm Zelman & Associates, a unit of Walker & Dunlop . A former Credit Suisse analyst, Zelman is well known for her prescience in 2007, when she warned on the eve of the financial crisis that the housing market’s issues extended well beyond the subprime mortgage space. That same year, she left Credit Suisse to co-found her firm, which has become a leader in housing-market research and analysis.
Zelman shared her views with Barron’s following the firm’s annual housing summit in September, and again in early October. An edited version of the discussions follows.
Barron’s: Economists decry a weak housing market, but buyers and sellers see things differently. Why the dissonance?
Ivy Zelman: Economists are incorrectly evaluating the housing market based on the volume of existing-home sales. They’re talking about how weak the market is because the volume of existing-home sales is close to recessionary lows. They might be attributing that to the NAR settlement, which we wouldn’t. [The National Association of Realtors settled a class-action suit earlier this year that bars real estate agents from communicating about commission rates on most home listings.] What economists don’t appreciate is that turnover is extremely depressed not because there is a lack of demand but because of the lack of supply.
I’m not suggesting that the existing market is going gangbusters, but a lot of economists say, “We’re already in a recession—just look at the housing market.” I don’t believe the housing market is an indicator that we’re in a recession at all. In fact, the housing market, despite the lack of turnover, is still pretty healthy.
Economists need to better appreciate the dynamics between the new- and existing-home markets. Whether it’s existing-home sales, home prices, new-home sales, or housing starts, drilling in on only one of those things isn’t going to give you the full picture. You have to look at it holistically.
What, if anything, concerns you about this market?
We have been focused on first-time buyers’ balance sheets. I’m concerned that many buyers with high-quality credit scores bought homes and stretched, and now have high debt-to-income ratios.
Early delinquencies aren’t only going delinquent faster but also doing so at a higher rate. This is a direct consequence of people stretching and buying more than they could afford during the Covid pandemic or government-stimulus days.
The September jobs report was surprisingly strong. What does that mean for mortgage rates and the housing market?
Mortgage rates were hovering at a little over 6%. Since the original interest-rate-cut rumors, bond yields have come down substantially. Now they are moving up again.
Mortgage rates will move higher [in the near term]—with one caveat. The spread [between mortgage rates and 10-year Treasury yields] really matters. That spread is related to what is happening in the secondary mortgage-backed-securities market. The Fed isn’t really buying mortgage-backed securities anymore, and big banks aren’t buying mortgage-backed securities, so there is less demand, which widens the spread.
At this point, we’re assuming the spread doesn’t change much. Thus, mortgage rates that were 6.1% last week will go back to almost 6.4%. That isn’t good for affordability, or housing.
Housing demand could get a short-term pop as a result of rates ticking up. The psychology of a buyer might be, “I’d better rush in and buy because rates are ticking back higher.” That usually lasts for about three months. But, on average, an increase in mortgage rates isn’t a good thing.
Builders have had a good run, as have their stocks. Where is the industry headed?
The builders have done a tremendous job of improving their overall operating structures, their balance sheets. Despite rates rising, they have still had strong results. The stocks have reacted positively to rates coming down, as they did historically.
The new-home market will be a slow grind of growth. Incentives will continue, mortgage-rate buydowns being the most prevalent. [In some mortgage-rate buydowns, a home seller will pay to lower a buyer’s mortgage rate, either temporarily or for the life of the loan.] Builders are mitigating stretched affordability by giving the consumer a better rate, so they are taking share from the existing market.
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The only time stocks in our space don’t work is when a recession will trump lower rates. Right now, the Fed is saying it doesn’t see a recession. That is why the XHB [
SPDR S&P Homebuilders exchange-traded fund] is up almost 30% this year.
As long as we remain in the soft-landing environment, housing stocks will perform better than anticipated in terms of their earnings growth—with one caveat. I expect margins in 2026 to start to reflect that there no longer is a benefit from the land that home builders purchased pre-2020. In ’26, they will be selling homes that have a much higher land basis. That might turn investors off.
Which builders will perform best?
Move-up builders will outperform first-time-buyer builders. Move-up buyers are benefiting from all the equity appreciation that people have in their homes. They can trade up, whereas first-time buyers are struggling to get approval from mortgage originators and come up with a down payment.
Dream Finders , Lennar , PulteGroup , Toll Brothers , and Taylor Morrison all have a move-up component to their business. Toll Brothers has been a big favorite, trading at a discount compared with its peers. It is benefiting from the wealth effect and the equity built up by many move-up buyers who can take advantage of home-price appreciation.
Are there any exceptions to the move-up rule?
Take a special situation like Meritage Homes . Its competition is the existing-home market. When you go into some new homes, there are no window treatments; you have to get landscaping; you have to get appliances. Meritage is giving the buyer all of that. You can move in tomorrow, and all those things are going to be there as part of your purchase.
With inventory rising in many markets, that gives them a competitive advantage. Meritage, as a spec builder, is going to continue to move inventory. It is their strategy: They are willing to forgo margin to sustain volume at high levels.
Lennar is more entry-level. We recently upgraded Lennar to Outperform. We think the spinoff of Millrose [a land-development company] will drive much higher returns in the longer term for them. We are betting the transformation will be successful.
Both presidential candidates have floated ideas for how to reduce housing costs. What can, and can’t, the federal government do to improve home affordability?
The Kamala Harris camp has talked about several things they’d like to do. A $25,000 tax credit for first-time buyers would help some people who are stretched and don’t have the down payment, but the real issue isn’t about demand. It is a function of availability and qualifying for mortgages with higher debt levels. I think the [Harris campaign’s] focus on boosting demand is the wrong strategy.
[The Harris campaign] is also talking about [supplying] the market with another three million housing starts over four years. There are major impediments to getting starts completed at the local level. The cost of development is significant in many markets. The federal government today can’t really do anything to spur more development without providing tax incentives to developers or local governments.
In addition, Harris talks about removing tax benefits for investors who are buying single-family homes. Investors purchasing homes are believed to be taking away what otherwise would be available to first-time buyers. There might be some truth to that. Institutional investors are very small in comparison to the mom-and-pop investors. She’s also talking about rent control, which I don’t think would help affordability when it pertains to first-time buyers.
Donald Trump has talked about providing federal land to developers. We don’t know more than that; you can speculate. Roughly 30% of the nation’s land is owned by the government. It is skewed to the Western U.S. Make the assumption that they decide to give builders land at a much lower cost basis; then, builders can build a lot more affordable homes. I don’t know if that will come to fruition, but that’s possibly directionally the right way to go.
Hurricane Helene’s destructive impact on places such as Asheville, N.C., was a shock. What do climate events mean for homeowners now and in the future?
They are devastating and catastrophic for many people. The home insurance industry is in disarray, and it will become harder and harder to get insurance. People are already fleeing certain areas.
The more that we have these types of events, the more we will see that people decide they don’t want to live in endangered markets anymore. They might relocate to areas that are more affordable, such as the Midwest, that don’t have the same risk with respect to climate.
Builders should start building and taking bigger positions in the central part of the country because people eventually migrate away from climate-prone markets in the Sunbelt. My longer-term view is skewed to thinking that we’ll see more migration to the central part of the country.
Where are the strongest, and weakest, housing markets?
Weakness is most pronounced in Florida—Tampa, Sarasota, Naples, Orlando. Areas in Texas—Austin, Dallas—are weaker. We have seen weakness in Phoenix. Those markets are seeing inventories rising at a faster rate than the national rates.
There is resilience in the Northeast—again, more skewed to that move-up price point. Even on the West Coast, in pockets of California where it has been a bit more sluggish, the high end has been performing well, according to builders. Las Vegas overall is doing better than a lot of other Southwest markets. There is a divergence that I attribute to where there is the most production of homes. The largest increase in listings is where we see the weakness.
Thanks, Ivy.
Write to Shaina Mishkin at shaina.mishkin@dowjones.com |
