"Poison Ivy" Zelman's says "Stuck Factor" has Housing Market Stuck

Ivy Zelman’s truth-telling about the U.S. housing market earned her the nickname “Poison Ivy” in 2005 when she called the top of the housing bubble. When the Toll Brothers CEO claimed the market had bottomed in 2006, Zelman quipped, “Which Kool-Aid are you drinking, because I want some.”   

Lance Lambert writes for yahoo!finance, “Fast-forward to 2022, and Zelman once again has housing bulls sweating.” Zelman called this past February as the top of the latest housing bubble and so far she’s right on the money. 

“Inventories in certain markets—mostly on the West Coast, Southwest, and Mountain states—are rising at Mach speed,” she told the Macro Hive Conversations podcast. “As fast as [inventory levels] are rising and demand is plummeting, we could see pretty substantial [home] price corrections. But it’s going to vary by market,” Zelman says. “I don’t think this will just end quickly. This is going to be a very pressured market nationally in 2023 and 2024.”

In a call with David Rosenberg Founder and President of Rosenberg Research, she said 

all the talk of a shortage of housing units is nonsense. The pending backlog will lead to an over built housing market. Population and household growth is sliding, with an aging population and roadblocks to immigration. 

There may be a shortage of shelter, but what’s being built is too expensive and 20-39 year olds are living at home. Migration continues to what Zelman calls the smile states (sunbelt). We’re in balance right now, she says. New starts when finally finished, especially the permitted 700,000 multifamily permits will lead to an oversupply. Zelman points out that the housing pipeline of supply is at an all-time record. 

The west and south have most of the backlog. The latest boom was a credit bubble she explained, driven by low interest not housing fundamentals. But now, monthly P&I payments are up over 50% in a matter of just a few months. Builders can get their pricing if they are selling four units a month in a subdivision. Last year builders were averaging six sales per month, now it's below  four. So, Zelman’s incentive index has reached a new survey high (since fall 2007). The incentives are mostly mortgage rate buydowns, and credit towards closing costs. Zelman told Rosenberg that what’s interesting is that 20% of builders say the incentives are not effective at all. For instance, in Phoenix, Austin and Boise, new homes can’t be sold at any price. 

Builders orders are down 35% after last year’s supply disrupted 30% decrease, just as the number of communities has increased at the wrong time. This, while there are 360,000 spec units on the market. Builders built all the spec (unsold) units they could to avoid input price increases. 

Now, average unit pricing is down 10% and cancellation rates (nationwide) have hit a new high of 23%. In the west (California, Arizona and Nevada) ‘can’ rates are 42%. All this while employment is still strong. Zelman forecasts prices to fall 12% from the peak. 

Builders were tying up all the land they could mostly via option agreements that they are now walking away from. Locally, here in Las Vegas, an educated source tells me builders are still loading up on dirt.  

According to Zelman, building lot prices remain sticky, possibly from buying from build-to-rent builders.

She sees 2022-24 starts to drop 25%. Non-production starts will be lifted by build-to-rent developers. There has been considerable capital –$100 billion– invested into build-to-rent

projects. Build-to-rent builders are buying directly from production builders, and when they do, they are demanding price breaks, according to Zelman. Some builders say 25%-30% of their sales are to build-to-rent developers. Nationwide, 7% of production is earmarked for build-to-rent units. However, in Phoenix 20% of inventory is build-for-rent. 

Existing home sales are undergoing a historic sharp contraction in sales. And, what will keep the residential market sluggish is what Zelman calls the “Stuck Factor.”An incredible 92% of homeowners with mortgages have a 5% rate or lower. Nearly half of those with a mortgage have a rate of 3.5% or lower. As long as rates stay where they are, or higher, people aren’t moving anywhere except in the case of the three D’s-divorce, death, or  default. 

With the Fed out of the MBS (mortgage backed securities) buying business (for now), the spread between 10-year treasury rate and the mortgage rate is the highest it has been at 2.95%. Mortgage rates should be 5.7%, according to Zelman instead of over 7%. The high rates make affordability worse than during the last boom. And, with the Fed having $2.7 trillion of MBS left to unload, the spread will not likely go back to normal levels.  

The mortgage business is a “bloodbath” due to high rates and the “Stuck Factor” and mortgage business failures are likely.  

While apartment rents have been “on fire,” increased supply will apply downward pressure. Apartment rents are sliding in Las Vegas according to Eli Segall reporting for the Las Vegas Review Journal. “The average asking rent for Las Vegas-area apartments was $1,451 per month during the third quarter, down almost 2 percent, or $29, from the second quarter, according to the Nevada State Apartment Association.” This is after rents rose 22% in Sin City last year. 

Housing pain is here again.