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Zelman on housing


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I recently came across Ivy Zelman, who seems to be a well-respected housing market analyst. I think she made some good calls back in 2006 and 2013, as evidenced by the above video. Lately, there are lots of uniformed optimism for residential housing (including multi-family) in the market and this board so it's interesting to hear a contrarian view. There are a lot of videos on YT but the one I watched is 

 

 

 

Her general thesis: Tremendous amount of institutional capital has been raised to be deployed into SFH build-to-rent and multifamily markets (she specifically called out the Phoenix market). Much optimism has been built into the underwriting process such as the ability to raise rent. Couple that with the slowest household formation in the past decade, we will be looking at an oversupply and not a housing deficit. This will lead to many dissappointed investors who are expecting double digit lever returns.

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I dont think being super bullish in 2013 was the right move. The housing market really didnt do anything until 2020. The institutions can underwrite whatever they want but theres a very fixed supply of existing MF and SF housing and massive constraints for a long time until that can be built out. Best case if you start today is ~2-3 years assuming you have a great contractor and elite leasing team. Thats all that matters if you're in an area that people want to be. Ive got equal concerns about all the office overhanging NYC type markets being converted to MF as well...but whats that gonna take? 5-10 years to build?

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48 minutes ago, LounginMKL said:

 

Her general thesis: Tremendous amount of institutional capital has been raised to be deployed into SFH build-to-rent and multifamily markets (she specifically called out the Phoenix market). Much optimism has been built into the underwriting process such as the ability to raise rent. Couple that with the slowest household formation in the past decade, we will be looking at an oversupply and not a housing deficit. This will lead to many dissappointed investors who are expecting double digit lever returns.

Yes a tremendous amount of capital has been redirected into rentals, but think about the displacement created by the Fed's balance sheet. They displaced trillions of dollars of institutional capital and I don't know anyone who genuinely feels they will actually unwind their balance sheet. We are clearly in a housing deficit today. Maybe we have an oversupply in the future but that's likely many years away. 

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Theres also the fact that institutions, being the smart money, did what smart money typically does...they effectively missed both industrial and MF. Especially foreign money. The move up in the past few years really just got the appetite going. If you asked a European investment firm what they knew about US MF housing 5 years ago they'd scratch their heads. A lot of that is cultural. Nonetheless, when its likely the safest amongst the safe RE type investments you can make, and inflation protected, you better believe a long, hard rerate is coming. Except....there's really not much supply. These morons will be paying up, for a long time. 

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8 hours ago, Gregmal said:

I dont think being super bullish in 2013 was the right move. The housing market really didnt do anything until 2020. The institutions can underwrite whatever they want but theres a very fixed supply of existing MF and SF housing and massive constraints for a long time until that can be built out. Best case if you start today is ~2-3 years assuming you have a great contractor and elite leasing team. Thats all that matters if you're in an area that people want to be. Ive got equal concerns about all the office overhanging NYC type markets being converted to MF as well...but whats that gonna take? 5-10 years to build?

I guess it depends on where are you in 2013. In the Bay Area, I vividly remember the sentiment shifting in the Spring of 2013, follow by a jump in house price. The price has been going up since. 

 

Yes, I've read that 12.3 million American households were formed from January 2012 to June 2021, but just 7 million new single-family homes were built during that time. We add the tradesman shortage, inflated land cost/ building materials, local NIMBYism; and we have a multi-year tailwind in the making... I think she was talking about all the new supplies that are coming online in the Sunbelt states, say the fringe of Phoenix? Zelman also mentioned that despite the Great CA Exodus narrative, there are only 0.3% of the population that moved out of CA (based on the USPS change of address). She was also talking about affordability- there is only so much rent increase you can extract, before people say "no." She seems to suggests that a lot of underwritings are depending on continued rent growth and this may not be realistic. With inflation eating away discretionary income, people's finances are getting strained.

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1 hour ago, LounginMKL said:

I've read that 12.3 million American households were formed from January 2012 to June 2021, but just 7 million new single-family homes were built during that time. 

 

How are you getting the 7 million figure?  If I add up the annualized housing starts as of January of each year from 2012 to 2021,  I get 11.636 million.  See https://fred.stlouisfed.org/series/HOUST.

 

In addition, according to Buffett, we already had an extra supply of 3 to 4 million houses as of 2010.  See https://buffett.cnbc.com/video/2010/01/20/buffett-a-bad-number-for-housing-starts-is-good.html.

 

This time, the extra supply is going to be less geographically constrained, especially for higher income folks who can work remotely at least some of the time.  

 

 

Edited by LearningMachine
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8 hours ago, LearningMachine said:

 

How are you getting the 7 million figure?  If I add up the annualized housing starts as of January of each year from 2012 to 2021,  I get 11.636 million.  See https://fred.stlouisfed.org/series/HOUST.

Thanks. I'm lazier and just pulled from this article- https://www.cnbc.com/2021/09/14/america-is-short-more-than-5-million-homes-study-says.html

 

8 hours ago, LearningMachine said:

In addition, according to Buffett, we already had an extra supply of 3 to 4 million houses as of 2010.  See https://buffett.cnbc.com/video/2010/01/20/buffett-a-bad-number-for-housing-starts-is-good.html.

I always wonder about that- thanks for sharing.

 

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How much of the supply has been vacuumed up by institutions like BX, Blackrock, REITs, etc since 2010? People still want to own homes and there is a record shortage of them available. Buffett also said we were in for a Great Depression in 2020…..

 

The institutionalization of housing in many ways is very similar to the BTC bull thesis in that the capital available will inevitably dwarf the product available. Plenty of people gave us great technical sounding, academic arguments on BTC at 10k, 20k, 30k….and Buffett also had an opinion. Sometimes things are just simple. Home prices and rental prices are going to play a game of who can rip hardest and in part bootstrap each other higher one level at a time. 
 

The biggest component everyone misses is just how much demand is currently sidelined. It’s silly to just assume everyone who’s looking has bought and there’s going to be this precipitous fall down. 

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The thing I dont see a lot of folks processing is that we're on the precipice of a major shift, if it has not already occurred. Cash is worthless and bonds are done with the decades long bull run. Hard assets are now in line for a run on par with what we saw out of tech the past decade. How do we know? Because just like with tech, we see the crowds screaming bubble after ONE year! You need folks in denial for the markets to really get going... And then again in 2012. And oh so most definitely after 2013...that had to be the top. Home prices rising 20% year over year after largely nil for a 5-10 year stretch doesnt mean jack. By process of elimination cash and bonds will be phased out by sensible investors. Leaving equities and hard assets. Equities have enjoyed the run, hard assets, not so much. The last crutch to destroy is the notion that a 3-5% mortgage will kill housing. By the time thats done being destroyed as a narrative you'll probably want to be selling your housing stocks to the folks who after thinking that for a decade now want to buy....but we're a long ways from that. As Ive said a million times, why wouldnt our housing market follow some similar trajectory to Canada, especially now that the underwriting process isnt Wild West style like in 2000-2006. 

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3 hours ago, Ulti said:


Thanks for posting. What i like about calculatedrisk is he is rational, fact based, open minded and balanced.

 

“In conclusion, I agree with some of Zelman’s comments, but I’m skeptical of the “overbuilding” argument, and the “halt the market” is a clear exaggeration. Also I disagree with her apparent reference to prices falling (“top of the market”) . But I pay attention when Ivy Zelman speaks (and reconsider my views)!”

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the “NAR report calls an "underbuilding gap" of 5.5 to 6.8 million housing units since 2001.”

I don't know how things are in the rest of the country, but here in Atlanta the local government is pushing to

have sf lots be zoned for mf. All because of limited housing and need for more tax revenues. I think this is adding to the push for having a separate Buckhead city.  I don't think the lack of housing will start to end here until boomers are off to the nursing homes.

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Yep, that's the close-in suburban single family home bull case. everyone here in DC is up in arms about increasing density in the name of equity / helping the less well off by increasing supply of housing. 

 

it's like okay...don't allow more density/new supply (status quo)...then my house value goes up.

 

allow my 1/3 an acre to have a quadplex on it...then my house value goes...up. 

 

a little @Gregmalian 🐂🐂🐂🐂 logic for ya, NIMBY's win or the YIMBY's win, house values go brrrrrrrrrrrrrrrr

 

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I am skeptical we are overbuilding single family, but I do think there is over building in multi-family.   The supply has not come online yet, but there is a ton of it being built.  Housing prices increase with the rate of inflation in the long run and thats it.  This has been proven over and over by history.  They might increase more rapidly in some parts of the country for awhile until they implode, but this has happened repeatedly.  There is nothing new.   Low mortgage rates caused them to increase very rapidly in 2020 and early 2021, but thats over.  They are now topped out for awhile and will either drop in price or go sideways for awhile, IMO.  I dont see them really increasing more.   Home sales have slowed down dramatically from last summer.   I agree bonds and cash are not real alternatives to hold long-term, so some people are comfortable putting more into a house.  Younger people seem very comfortable with crypto through so I am not sure they will lever up a huge mortgage or most of them anyway.

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https://www.cnbc.com/2021/10/19/single-family-rents-are-surging-and-investors-are-flooding-the-market.html

 

Another day, another piece. 

 

Its almost insane to think about making a claim about oversupply and/or lack of demand. But the most important element lays in the last paragraph. First time home buying still aint getting to the table. The bigger the piece of the market the institutional capital owns, the more pricing power they have(plenty of first hand experience and stories on that....25 year olds scoffing at rent raises in Tampa, telling their landlords to fuck off, and then......getting nothing anywhere else). Rents going up supports higher home prices. Higher home prices support higher rent prices....what a great and virtuous cycle!

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https://calculatedrisk.substack.com/p/most-housing-units-under-construction?utm_campaign=post&utm_medium=email&utm_source=

Currently there are are 714 thousand multi-family units under construction.  This is the highest level since 1974! For multi-family, construction delays are probably also a factor. The completion of these units should help with rent pressure.

 

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38 minutes ago, Ulti said:

https://calculatedrisk.substack.com/p/most-housing-units-under-construction?utm_campaign=post&utm_medium=email&utm_source=

Currently there are are 714 thousand multi-family units under construction.  This is the highest level since 1974! For multi-family, construction delays are probably also a factor. The completion of these units should help with rent pressure.

 

 

yea, anyone who wonders outside their house and drives around a bit can see multi-family being built like crazy.  The people who were smart enough to build a few years ago are already cashing out as they see the mountain of supply coming.  Ultimately, it will cause older units to drop rents to compete with newer ones.  Supply always cures demand.  Multi-family always overbuilds at the top.  Its as old as time itself.  There is nothing new.

 

Edited by Gmthebeau
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I’m pretty sure @ERICOPOLY already posted something on it, but anyone care to bring up what average rents were in 1974 vs 1982? Building more just helps alleviate the fact that right now plenty of people can’t get ANYTHING. Even those who really want it and CAN afford it. Why are JOE homes going ballistic in terms of price? I though it was all just barren swamp out there(guess what, it kind of is! And it still don’t matter) and that the second someone wanted to live there builders would flood the market? Nope. 
 

The anti housing people are starting to sound like the people that wanted to fight the fed in 2013. As always, the scoreboard will ultimately settle who’s right over the next 1/3/5. 

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58 minutes ago, Ulti said:

https://calculatedrisk.substack.com/p/most-housing-units-under-construction?utm_campaign=post&utm_medium=email&utm_source=

Currently there are are 714 thousand multi-family units under construction.  This is the highest level since 1974! For multi-family, construction delays are probably also a factor. The completion of these units should help with rent pressure.

 

 

714k.  Impressive sounding.  How many are needed?

 

https://www.marketplace.org/2021/07/02/how-many-more-housing-units-do-we-really-need-to-build/

 

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I don't know.  You guys seem to be talking about what's going on today, not what's likely to be going on in a few years.   I have already seen housing sales slow dramatically.  I have seen prices stop rising.   Perhaps that will all change again but I doubt it, because most people buy a payment not a house.  They can only afford so much.  Interest rates will rise somewhat which will hurt demand at the margin.  Maybe not dramatically but somewhat.   The huge supply of multi-family coming will have an impact.   I heard in 2005 we had a housing shortage too.  We only have a housing shortage until prices rise enough to bring in more inventory, or interest rates rise enough to pull out buyers, or we have a recession and people lose their jobs and can't buy.   Nobody is living on the street (who can afford a house) so I dont buy all the we have a housing shortage stuff.  Just my take.  a 100 years of data proves housing prices rise at the rate of inflation.  It will rise slow or faster at certain times, but over the long run thats all it does.

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Are there any divorce statistics available?  Any links?

 

Anecdotally my wife and I know of a few couples who seemed to get along alright until they started working from home in 2020 due to covid-19.  Now they are separated or divorced.  Now each prior couple requires an additional housing units and it is typically a rented unit.

 

That kind of event can spur new household formation and I think it is reasonable to call it a one-off.  Later, these free floating singles will eventually pair up again.

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