There have been several sound bites lately about the prognosticator who called the last bubble – and at first glance, the headlines want you to think that she is calling the top again. But she’s not – all she said was that housing production is going full steam – an excerpt:
“The perception that housing is drastically undersupplied and that a strong demographic picture lies ahead is creating a false sense of security,’’ according to a report by Zelman’s firm entitled “Cradle to Grave.’’ “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.’’
“No, we don’t have a deficit,” Zelman, who founded Zelman & Associates, said in an interview with The Real Deal. “We have a pipeline of activity that actually would put us in an overbuilt situation relative to normalized demand.”
Granted, 2021’s housing landscape differs in some significant ways from 15 years ago. Mortgage underwriting is solid, making it unlikely that a mortgage-backed securities implosion is coming. Yet the oversupply of homes, combined with an aging population and rising mortgage rates, could cause prices to drop in certain markets, leaving home builders stuck with unsold inventory.
Zelman’s bearish take has new legs in the wake of Zillow’s decision to exit iBuying after incurring significant losses. The company is seeking almost $2.8 billion from the 7,000 homes it bought and is firing a quarter of its workers, saying it’s just too hard to predict home prices. To Zelman, Zillow’s struggles are a harbinger of future woes, especially in places where investors — rather than 2.4-child families — have driven demand such as Phoenix and Boise.
“All this price war and bidding, how much is it being inflated by iBuyers basically bidding against the teacher, the fireman, the policeman?” said Zelman, who is promoting her new book, “Gimme Shelter: Hard Calls + Soft Skills From A Wall Street Trailblazer.’’ Phoenix is among the riskiest markets, particularly for builders, because of all the buying by investors, she said, also citing Austin, Dallas and Houston.
Zelman’s thesis bears some similarities to her commentary in 2006. Mainly, homebuilders aren’t realistic on forecasting supply and demand. Too many developments coming down the pipeline peddling homes at unaffordable prices.
Her firm’s report makes the case that U.S. population and household growth will ultimately determine housing demand. “Population growth — the crucial underpinning of future housing demand — is on a troubled trajectory,” the report said.
Zelman said she recently spoke to a homebuilder in Boise, Idaho who is producing 2,000 homes a year. The builder said home prices are reaching unsustainable levels.
“They said it was like a light switch, like the market just literally turned off,” said Zelman.
Combine this with the near-certainty of rising mortgage rates and homeownership becomes even more unaffordable. Most homeowners are locked in at a rate below 4 percent because of record low interest rates by the Federal Reserve and billions of dollars in purchases of mortgage backed securities.
“Rates matter,” said Zelman. “We think the market has been juiced.”
Only certain markets are at serious risk, Phoenix among them. Many of the city’s new home starts are being constructed by build-for-rent builders. It’s also a place loaded with “non primary buyers” such as private investors or tech companies.
We know that North San Diego County is mostly built out, so any homebuilder woes aren’t going to change the resale market around here.
At these interest rates and sales prices it is supply that rules house sales and there is not enough supply. Sure, rates and/or prices could become the driver but not yet.
That real issue is not unknown to real estate in decades or centuries past. Location, location, location.
San Diego and environs has location, location, location and that is unlikely to change.
Ivy is correct that the level of investor participation is some level of “high” and subject to radical swings in positions.
Here is Rick’s summary of builder comments for various markets (emphasis added in bold):
#ColoradoSprings builder: “One cautious trend to watch is single-family rental businesses paying more for land than builders. This will suck up trade capacity & supply at a time we can’t afford it.”
#Denver builder: “Traffic & sales definitely slowing down, but also following a more seasonal pattern as compared to 2020. Resale inventory is still historically low. Rents are skyrocketing again.”
#Austin builder: “Price of homes is unaffordable for almost all of the population who lives here. The influx of people with equity from the coasts continues to drive the market. The lack of labor & materials means the demand can’t be met.”
#Dallas builder: “Due to a large number of sales in 2021, we’ll have declines in 2022. This is due to land availability. Huge number of communities coming online in 2023. Supply chain issues are getting worse & have spread to land development.”
#Houston builder: “Prices aren’t coming down in our market anytime in the foreseeable future, due to lag in supply caused by shortages in labor, materials, etc.”
#SanAntonio builder: “Labor shortages & material increases continue to stress home delivery. Market is still strong, but slowing a bit. Getting lots on the ground & material supplies are some of the challenges, as well as extreme materials theft.”
#Orlando builder: “No resistance to continued price increases due to lack of available building lots in our submarket.”
#Tampa builder: “At maximum capacity & with the tight labor supply, we do not see an opportunity to expand our production over the next 12 months.”
#Naples builder: “We’ve been temporarily sold out. New sales will begin again mid-November.”
#Chicago builder: “Just starting to get back at acquiring lots & starting to build.”
#Cleveland builder: “In 2022 there will likely be a 10% to 12% increase in prices over 2021.”
#Oakland builder: “Market continues to stay very strong in California. We are temporarily sold out at all of our communities.”
#Reno builder: “Demand is still strong but not as strong as it has been. Prices are already up 20%+ since June 2020. Another 20% would take us to possible bubble territory. Appreciation is moderating so I don’t think that will happen.”
#WashingtonDC builder: “Demand is waning due to price increases. We are no longer operating with sales caps in communities.”
#Harrisburg builder: “Market was very slow in August & September but really turned around in October.”
#Seattle builder: “Sales & closings in 2022 will be negatively impacted by limited supply of lots being delivered to the market in early 2022 with recovery in late 2022. No demand impacts are forecasted to impact sales or closings in 2022.”
#RiversideSanBernardino builder: “People aren’t selling their resale home because they have nowhere to go except out of state. The worst of COVID is past us but still people are afraid of selling because they can’t move up & there are no reasonable rentals available.”
#SanDiego builder: “I see price increases in 2022, 2023, & 2024 before I see a flattening in prices. We are far too supply restricted.”
#Birmingham builder: “Increased sales & production due to new communities coming online.”
#Charleston builder: “YOY projections are flat because of limited lots. Land entitlement process is lengthy. Our lot supply doesn’t increase our volume until 2023-2024.”
#Greenville builder: “Demand remains strong. Very little resale inventory & finished inventory sells quickly. It is very challenging getting supplies on a timely basis. This is impacting build times. Land development timelines continue to lag.”
#Wilmington builder: “We’ve taken our spec houses off the market. Once they reach cabinets, we’ll place them back on the market. Home prices will continue to rise slightly over the next 18 to 24 months.”
#Charlotte builder: “Sales are likely to go up as a result of new availability of homes to sell. Same goes for closings.”
#Atlanta builder: “We pulled so many extra sales & starts into 2021 that we’re going to be severely short on vacant developed lots in the first half of 2022, hence the huge projected slowdowns in sales & starts in 2022.”
“Zelman said she recently spoke to a homebuilder in Boise, Idaho who is producing 2,000 homes a year. The builder said home prices are reaching unsustainable levels.”
From a Boise bubbleinfo correspondent:
And I believe that builder is CBH. Largest builder in the state. His main niche seems to be the first-time homebuyers who want big square footage. They keep selling even though I’ve heard the nickname is “Can’t build homes.”
His newest development alone is about 2,000 homes projected. Also has a subdivision of smaller cookie-cutter homes which are advertised as “rent to own.”
We built in October, 2018 with a premier builder. It’s appreciated 53% in just 3 years. No plans to sell.
The inventory rose during the last part of the summer, but I see October inventory numbers decreasing. One RE agent said inventory (although doubled from earlier numbers in 2020-2021) will sell out in a month’s time. Even the cheapest homes (few under $350k or even $400k in outlaying cities) are no longer affordable to Idahoans as the wages here are some of the lowest in the country (except for Micron).
Rents have skyrocketed as more people move here. Boise had the highest rate of rent appreciation in the nation due to the onslaught of people moving in from NY, TX, CO, CA, OR, WA. (CA represents about 46%.)