Ivy Zelman, the housing analyst famous on Wall Street for calling the top of the market in 2005, less than two years before the collapse, sees warning signs once again.
After a historic run-up in values during the pandemic, housing in the U.S. is at -- or near -- the peak, she says. She’s cautioning clients that overheated areas with heavy concentrations of investors, including Phoenix, are likely to face “corrections.” A modest rise in 30-year mortgage rates, even to 4%, would bring demand to a halt, according to Zelman.
Cracks are already appearing: The pace of price growth nationwide has started to slow, and in Covid boomtowns such as Boise, Idaho, and Salt Lake City, bidding wars are suddenly giving way to discounts.
Zelman, 55, isn’t forecasting a nationwide crash on the scale of the last bubble, which was magnified by risky subprime mortgage lending. But the signs of trouble look familiar, she says: Investors are distorting the market by driving up prices beyond the reach of primary buyers, and builders with growing construction pipelines are bidding up land values.
The risk is that investors -- from iBuyers to private equity firms acquiring and building single-family homes for rent -- get spooked and start selling, overloading the market with supply. By the time builders finish homes they’ve now just started, demand may no longer be there, she says.
“If I’m a homebuyer right now,” Zelman says, “I want to wait because I think we’ve gotten to a level that’s not sustainable.”
Zelman, a former Credit Suisse Group AG analyst who co-founded her firm, Zelman & Associates, in 2007, talked to Bloomberg about her views. Her responses have been edited and condensed.
Is this the first time you’ve called the top of the housing market since the last crash?
It definitely is the first time that I’ve been concerned about the market being at peak levels, or near peak levels, since the last downturn, absolutely. And our concerns are obviously not very much the party line. We are the contrarians. Our views are grounded in fundamental research and understanding and appreciating the risk that right now I call “yellow flags.” So it may be that our concerns don’t come to fruition this year or possibly even in ’22, but we definitely see a storm brewing.
Investors, from iBuyers to private equity firms and sovereign wealth funds, are chasing housing in all forms. Won’t that just continue to prop up values?
It’s really a function of when does pricing hit a wall and when do you start to see pushback, whether it’s affordability or just buyer fatigue. I’m concerned that the market is definitely artificially inflated by investors. Prices won’t be sustainable if the returns start to flatten out or even come under pressure.
We’re faced with the worst housing shortage in history. How could that possibly change?
We don’t believe we’re in a shortage, so our view is different than the market’s perception. We’ve been more concerned about the level of growth in household formations in the U.S. Actually this past decade, it grew at the slowest pace on record.