Episode #403: Ivy Zelman, Zelman & Associates – Here’s Why This Housing Expert Says The Market is “Euphoric” and Urges Caution
Guest: Ivy Zelman is the CEO and co-founder of Zelman & Associates, a leading housing research firm. She was recently named to Barron’s 100 Most Influential Women in U.S. Finance.
Date Recorded: 3/16/2022 | Run-Time: 52:18
Summary: In today’s episode, we start by going back to 2008 and hearing what led her to be one of the few housing bears. Then we get into the housing market today, which she describes as euphoric and bonkers. She explains why poor demographics and lack of affordability due to rising rates lead her to think the market is over-extended today.
We also get her thoughts on other important trends effecting the housing market today: the entrance of iBuyers and Wall Street firms, why she doesn’t think housing demand is as high as other analysts, and the impact of supply chain issues.
Sponsor: MUD\WTR is a coffee alternative that supports your morning ritual without all the anxiety and jitters of coffee. Get your starter kit and free frother at mudwtr.com/meb and use code FABER for 15% off.
Comments or suggestions? Interested in sponsoring an episode? Email us Colby@TheMebFaberShow.com
Links from the Episode:
- 0:40 – Sponsor: MUD\WTR – Use code “FABER” for 15% off
- 1:49 – Intro
- 2:47 – Welcome to our guest, Ivy Zelman
- 3:35 – Ivy’s framework for looking at the housing market
- 4:20 – Ivy’s time at Credit Suisse focusing on housing in the 2000’s; Gimme Shelter
- 10:56 – Why Ivy was bearish on the housing market before 2008
- 14:06 – How she made her move to starting her own company during the financial crisis
- 16:31 – What led Ivy to turn bullish in the early 2010’s
- 19:27 – What Ivy thinks on the housing market today
- 35:10 – Meb’s tweet on buying a house without seeing it first
- 35:29 – Areas that Ivy is most bullish or bearish on
- 38:45 – Their thoughts about housing and real estate outside of the US
- 40:57 – The importance of mentorship
- 46:53 – Her most memorable housing story over her career
- 48:09 – Learn more about Ivy; Gimme Shelter; zelmanassociates.com
Transcript of Episode 403:
Welcome Message: Welcome to “The Meb Faber Show” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas all to help you grow wealthier and wiser. Better investing starts here.
Disclaimer: Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.
Sponsor Message: Today’s episode is sponsored by MUD/WTR. MUD/WTR is a coffee alternative with four adaptogenic mushrooms and ayurvedic herbs with one-seventh of caffeine as a cup of coffee. You get energy without the anxiety, jitters, or crash of coffee. Each ingredient was added for a purpose, … and chai for mood and a microdose caffeine, lion’s mane for alertness, cordyceps to help support physical performance, chaga and reishi to support your immune system, turmeric for soreness, and cinnamon for antioxidants.
If you’re a long-time listener to this show, you may have heard me say, “I’m having a cup of MUD,” during an episode before. My current favorite is the new Resplin and non-caffeinated tea, which has become part of my evening routine. And not only am I an avid customer, but I love the products so much that I became a new investor in the company. And if you haven’t listened already, check out episode 259 when I spoke to MUD/WTR founder and CEO Shane Heath about why he started the company. MUD is Whole30 approved, 100% USDA organic, non-GMO, gluten-free, vegan, and Kosher-certified. Go to mudwtr.com/meb to support the show and use code Faber, that’s F-A-B-E-R for 15% off. That’s mudwtr.com/meb and use code Faber for15% off.
Meb: What’s up my friends? We’ve got a great episode for you today. Our guest is Ivy Zelman, CEO and co-founder of Zelman & Associates, a leading housing and research firm. She was recently named the Barron’s 100 most influential woman in U.S. finance and gained notoriety leading up to the global financial crisis when she pounded the table that the housing market was overheated, even asking Toll Brothers CEO, Bob Toll, “Which Kool-Aid are you drinking,” on an earnings call.
In today’s episode, we start by going back pre-GFC and hearing what led her to be one of the few housing bears, then we get into the housing market today, which she describes as euphoric and bonkers. She explains why poor demographics and lack of affordability due to rising rates led her to think the market is overextended. We also get her thoughts on other important trends affecting the housing market, the entrance of iBuyers and Wall Street firms, why she doesn’t think housing demand is as high as others do, and the impact of supply chain issues. Please enjoy this episode with Ivy Zelman.
Meb: Ivy, welcome to the show.
Ivy: Thank you for having me.
Meb: Where do we find you today, and what’s home?
Ivy: New York City.
Meb: Weren’t you in Ohio for a little while?
Ivy: Yeah. I’m a de-nester now, so kind of in a mobile mode.
Meb: It comes full circle. You started your career in New York. The only reason I said that is because I was in Cleveland. Look, I’m wearing a Broncos hat. My brother wanted to go to Ohio because, little fact, listeners, there is a brewery hotel in Columbus where it’s literally a hotel inside of a brewery called BrewDog. I went to a Broncos game, which we sadly lost, of course, but got taken through the Muni Lot, got the full Cleveland experience. And only got told to F off twice, which I think is the under if you’re wearing a Broncos…
Ivy: You’re pretty brave.
Meb: Well, I had some Cleveland friends, which were showing us around. They were, like, bodyguards. So we’re going to talk about all things housing. Tell us a little bit about what your firm does, and then we’re going to dive into all sorts of different things.
Ivy: Sure. Zelman & Associates, until recently, was an independent research boutique that focused exclusively on the housing industry. And we rate stocks by hold and sell. So we cover about 55 stocks. And they all fit into what I call the housing ecosystem. And we also have an advisory business, investment banking services that, again, focus on housing. And we recently sold our business, a majority stake, to Walker & Dunlop, which is a commercial lender. They do investment sales, a publicly-traded company, WD. So just a glimpse of what we do.
Meb: Congratulations, by the way. We’re going to spend a lot of time on what’s going on in the world today and current conditions. We can’t really begin this show without talking about a little origins story. When you think back, certainly to the business model/industry that you began in, you were at Solomon Brothers back in the day. I love your book, by the way, “Give Me Shelter,” listeners. There are some great references to Wall Street and some photos too from the ’90s. I love the way you pronounced Solomon, CEO. But why don’t we start with your time at Credit Suisse, when you really focused on housing in the 2000s?
Ivy: Well, actually, I was focused on housing at Solomon as well. So I started in investment banking. Then after two years, I went into equity research at Solomon and covered housing there. Actually, I got fired at Solomon because Solomon was acquired by Smith Barney, and they had, at that time, the number one ranked housing analyst. So there was really only room for one housing analyst. And I was pretty devastated. But, fortunately, went to Credit Suisse where they hired me to be their lead housing analyst. And I did become number one that year. So they made a mistake. I was there for 10 years before I decided to take the entrepreneurial plunge. So, at Credit Suisse, it was a great 10 years there. And I was, fortunately, very respected and had a good experience.
Meb: Let’s talk about that period because you became pretty well-known during that time because if anyone remembers back to the early, mid-2000s, it was a little bananas in regards to housing. Walk us through because, typically, on the sales side, you don’t see a lot of sell ratings. Typically, it’s very bullish glossing over when you talk to a lot of the banks. But walk us through kind of that crazy bananas period.
Ivy: Well, we were definitely concerned in late ’04 that the housing market was running at unsustainable levels and was being fueled by really more investors than primary buyers. And the data was pretty clear that was supporting that view. We actually went neutral in late ’04, and we didn’t have sales at that point. We were stepping to the sidelines. And it was a pretty contrarian call even to be neutral. And it was really affordability that was the big red flag where you could see that any metric you look at, whether you’re looking at how much the consumer has to pay as a per cent of gross income for the monthly payment, or if you look at price-to-income ratios, it was glaringly clear that it was becoming less affordable.
And it was really thanks to, back then, Alan Greenspan, I blame him to some extent because in February ’04, he said, “Hey, go get an arm. Why bother with a fixed-rate mortgage?” And we had Fannie and Freddie that were pushing with their policy initiatives to really help push homeownership, which is coming from the administration, and had desktop underwriting, which allowed for people to be automatically approved. So there was a lot of, I think, culprits in what created eventually what would be known as the exotic mortgage products. So when Greenspan said, “Go get an arm,” it was almost like giving permission to lenders to come up with products that would offset the lack of affordability.
And as we continued marching through the first half of ’05, it was clear to us that investors were juicing the market with no money down, negative option arms. You had so many products that were known as, in layman’s terms, liar loans. That was sort of the soup du jour. I remember meeting with mortgage originators that were lending people money for homes that didn’t even have jobs. They were like, “It’s not my risk. Fannie and Freddie will buy it.” And so it was just the go-go days.
And in July of ’05, we published a report called “Investors Gone Wild.” And that was really the inflection point that we started getting a lot of attention in terms of our clientele at Credit Suisse that was every area of our firm. It wasn’t just people that traded home-building equities, which is what I was responsible for in building product equities. It was pretty much anyone in capital markets and asset-backed securitization, fixed income across the board that was paying attention.
And actually, the market did start to slow in the second half of ’05. Inventories started rising, and we did have a correction that lasted that was I guess relative to the bigger plunge that came later, it pales in comparison. But my stocks got pounded really through most of the second half of ’05 and most of ’06. But then in the fall of ’06, and we had done a few reports, one in the fall called “Wonderland,” which really talked about the risk of land values that were going to be down substantially given how much land inflation we had seen driven by all of this speculation.
And so I remember it like it was yesterday being on a conference call that Toll Brothers reported earnings and the CEO and Chairman, Bob Toll, said that they’re seeing improvement in Washington, D.C. And at that point, there was a lot of optimism that things were getting better and were behind us. And we didn’t believe it. We thought, “It’s only going to get worse.” And that’s when we sent to sell pretty soon after.
I remember Dennis McGill, my business partner who we’ve been together since he was a summer intern and still are together today, 22 years later, starting back in the summer of 2000, he and I banged out 10 reasons to sell homebuilding stocks and downgraded the whole group and continued to put out pneumatic reports and one which was published in March of ’07 called “Mortgage Liquidity du Jour: Underestimated No More.” And we were just drilling home that this is not going to end well.
And when New Century declared bankruptcy and soon after that report, that was the beginning of the end. But it was tough sailing because even within Credit Suisse’s organization, we didn’t have a lot of support. So, to stick to your guns and to continue to stay with your view isn’t always easy. But, fortunately, we had a good team. And actually, Alan Ratner who’s a senior homebuilding analyst is now with me 17 years was part of that team and a few other of my associates. But it was really the industry executives.
So one thing we do differently than a lot of other sell-side analysts and maybe more follow suite now is we rely on C-suite executives. And fortunately for us, a very fragmented industry, whether we’re talking to private home builders, land developers, realtors, mortgage originators, we’ve built a very significant Rolodex that helped us stay grounded in our concerns because they were telling us that they agreed with us and they were feeding us information about the excesses that they were seeing and the craziness. So that gave us more of the level of confidence to stay with our more bearish call.
Meb: Listeners who aren’t that familiar with your world, not only is their theoretical pushback from internal but also external when you’re particularly as negative as you were. And often, a lot of people when an asset class is romping and stomping, or there’s a bull market going on, and a lot of people are rich, getting rich, getting richer and are tied to sort of what’s going on, the reactions can often be from market participants a little bit nasty. Like, they don’t want to believe the party’s over. Was that a reasonable summary of reaction from actual end investors and clients, or were people actually like, “Oh, no, she’s spot on here”? What was the reception from the broad community?
Ivy: Definitely not, “She’s right.” The reality was the industry publicly-traded companies were jokingly calling me behind my back jihad or poison Ivy, laughing. Someday she’ll be right. So the publicly-traded companies have had a rhetoric that was, “This time it’s different. There is a secular growth in the demographic story that supports the outlook.” And they’d come out with two to three-year forecasts for 25% compounded annual growth and the stocks would just scream in my face. I actually had a lot of pushback from our largest clients, big and small. But the largest clients would actually complain to their salespeople, “Why is she asking questions about loan-to-value ratios,” or, “Why is she asking questions about FICO scores? Who cares? And why is she so focused on mortgages and their earnings are going up? She’s raising her numbers, and she’s still bearish.”
So while we were adjusting our models for count four of the current strength, we put out lots of reports that were trying to reiterate the rationale behind our thought process. But there was significant pushback. I had a client say to me, “I hope you’re right. They go down 40%, and then I’ll just buy more.” I felt like I was the sober person at a party. It wasn’t fun, but I think I look back on it and it is a relatively short period when you think about…call it the November of ’04 really to March of ’07. It’s not that long, but it was very long in those days. I’d come home sometimes tears, just getting beat up left and right. The salespeople internally, one salesperson in 2005 was like, “Okay, your stocks are down 40%. Take a victory lap. Go out there, and you’re going to be viewed as a permabear, and you’re going to lose your job at some point.” And I complained to my director of research. This was a fairly senior person. And they supported me. My director of research at that point was like, “You do what you think is right.”
And I had internal battles with our strategist and our mortgaging analyst, a person who followed Fannie and Freddie. I didn’t have a lot of friends that were maybe more optimistic that if it pertained to their lane. So we all had to stay in our lanes. There is an analyst that covers the home centres, there’s an analyst that covers the mortgage names, there’s an analyst that covers REITs. Anyone that touches the ecosystem doesn’t necessarily collaborate together, but there were a lot of people that were affected because home prices surging has an impact on the broader economy. So I think that they were dark days. But in hindsight, it feels like a very short period of time.
Meb: I think the housing ETF, and I don’t know if this is representative of exactly what you guys were looking at, the ultimate decline, and this also applies to REITs and commercial and everything else, 70%-plus in some of these parts of the world, that’s almost U.S. depression-level decline in a lot of these stocks and companies. So, as that happened and the financial crisis, you decided that, “Hey, not only am I not bearish on what’s going on in the world, I’m going to take the…” We like to say this about everyone who does this, optimistic nativity of just going and starting your own company. It’s probably one of the most volatile periods in housing and home-building history in the U.S. What was that time like? What were the emotions surrounding that? Was it something you were thinking about for a time, or you just woke up one morning over Cheerios and said, “You know what? Time to start my own gig.”
Ivy: I look back on it, and I think it was the culmination of a lot of variables. One, just appreciating that I believed that we built a platform. At the time, I only had a few hundred initial executives that were exchanging information with me. So I was providing them our research in exchange for their market intelligence. I like to call it boots on the ground. And I thought, “You know, I can monetize this network and do more with it than maybe I get remunerated at Credit Suisse.” And I also was frustrated with just the bureaucratic nature of working at a very large firm. You spend more time in meetings than you actually do in terms of real research. And I think that there was just an optimism that I can go do this and hang my own shingle.
And I did circle enough investors and industry executives to get more conviction that they would follow me. They didn’t really care the name on the door. They just wanted to continue a relationship. So it wasn’t a quick decision. Certainly, I’d say probably more than a year in the thought process. But I was remunerated really just on home building and building products equities and how they traded, which they’re a relatively small per cent, negligible really of the S&P. So it was a financial thought, “I can do better on my own,” but also the idea that it would be fun, and I wasn’t thinking the U.S. economy was going to go into the greatest recession that we’ve seen since the Great Depression. But I certainly thought, “I can go out on my own. I can always go get a job if I had to.” And initially, my husband was negative on it because he was like, “if you make a good living, why would you give that up and the security of it?” I really believe that the worst case was that I would just get another job if it didn’t work out.
Meb: So you didn’t get another job. You’ve been at it for a while. What were sort of the data points that really caused you to get a little more constructive on what was going on in the world?
Ivy: Sure. So we started Zelman actually October 3rd, 2007. We left in May, my team and I, in May of ’07. We had a 6-month bargain leave, no solicitations. So really it was the fall of 2011. At that point, we look at inventories in the United States for residential housing, really single-family thinking about it as a per cent of households. If you go back over 30 years, it allows you to have a historic trend line. They just exploded during the crisis. And they had really started unwinding to levels that were much more manageable, even below historic trend lines. So the inventories were getting cleaned up. We were seeing through our survey contacts more interest in actually buyers kicking the tires. Actually, the affordability ratios back in 2009 and ’10 were at record levels of affordability. But that wasn’t enough for us because we were still dealing with negative consumer sentiment, we were still dealing with high unemployment. Inventories were still elevated.
So despite affordability being attractive, we were being patient. And the stocks were still getting crushed. So there wasn’t really a bid. And I think it was, like, November of ’11, I was on a morning call talking to my sales force, which was a pretty small sales force. But I remember Pulte Homes was 4 bucks. And I was just like, “I think this might be the best buying opportunity I’ve ever seen in my career,” just to them, a half a dozen people. And the next thing you know, I’m getting calls from portfolio managers saying, “Did you really say it’s the best opportunity?” I was so sick to my stomach. So I just poked my neck out there. And then we made the official bottom call really in January of 2012.
And that was really based on demographics that were what we call a coiled spring. So when you have young adults that are unemployed, they tend to stay living at home longer. So when you look at the number of 20 to 39-year-olds that are living at home prior to the Great Recession, it was about 16%. And that shot up through the end of 2010 to almost 20%. And with unemployment declining, we felt that there would be more likely that pent-up demand would be released. And with inventories tight, we started looking at affordability ratios, as well as Google Search. I want to buy a home, I want to rent a home and buy a home, which on an index of 0 to 100, 50 being normal was in the, call it teens, 20s. It started actually moving up.
And we could see that when you quantify the number of people searching, I like to call it a special sauce, a lot of ingredients that go into it. But I certainly think that making that call in 2012 was the right call. And at the time, we were viewed to be contrarian, again, that housing was viewed to be a completely secular, negative story. People weren’t going to want to buy again. We were going to become a renter nation. And people have been too burnt. So that’s really the timeline of how we became more constructive.
Meb: You’re now in Cali. Let’s walk forward to the present. Let’s hear a little bit about your framework. You guys put out some pretty incredible, deep, thorough research. It’s really nice to spend some time with some of y’all’s slide decks. But if you were to condense some of the main muscle movements, some of the main points you really focus on when you analyze this market, what are they, and which way are they leaning in the breeze today?
Ivy: Well, I think that the demographics are really the foundation of our cycle call. And so we lean heavily on that. And Dennis McGill is our in-house demographer. And that’s a quite sobering outlook right now just based on what’s happening with the overall trajectory for both not only household growth but population growth, which has been on a downward trajectory. And we had household growth in this prior decade, hit the lowest ever on record, and population growth second-lowest on record behind the 1930s. And the outlook is even bleaker for this decade ahead. And then when you look at what the drivers are for growth, right now, the housing market is euphoric. And you have insatiable demand, and you also have significant governors aren’t getting starts in the ground and getting homes completed with supply chain bottlenecks.
So it has allowed for substantial home prices inflation. And I think people are either giddy or scared shitless. You’ve got a lot of dynamics that make it incredibly complex. But what we’re seeing is that local primary buyers really spiked during COVID. So the pandemic took a market that had been on an upward trajectory, especially the entry-level, because builders got a memo that finally they were listening like, “If you build it, they will come, if you go out to the fringe, the secondary, whatever you want to call it, tertiary markets.” But they weren’t willing to because there was really a tight mortgage market. So we analyzed the mortgage market and recognizing every aspect, every silo of it. The builders were reluctant to build further out, rightfully so after they got so burnt. And they were being very cautious on how much land exposure they wanted.
So, in 2015, D.R. Horton, a leading home builder in the U.S., they created a product called Express Homes, and they went out to the exurbs, and they started providing homes that were in the 1s, 100-plus, and the industry followed suit. And so really, 2016 was the trough in homeownership rate. And that’s something we’re obviously watching. And that homeownership rate has continued to proceed on an upwards trajectory and now hovering at about 65% and probably moving higher.
But the primary buyer, because of the level of investors that are in the market, has peaked out at the end of 2020, 2021’s first quarter peaking out after a substantial spike as COVID created a significant flight from urban to suburban to exurb with people desiring safety and more space, and they were taking advantage of really free money. Thanks to the Fed, we also saw tremendous stimulus that gave people incremental savings that otherwise they wouldn’t have. Also, they were not spending money in the initial shutdown.
So the housing market’s gone bonkers, just completely bonkers. But really, the first quarter of ’21, the primary buyer, overall being that renter converting to homeownership, peaked out. We’ve seen it now moderate continuously all through ’21 and into ’22 and it’s still slightly above historic trend line. But there are a lot of frustrated buyers in the market that can’t compete with cash buyers. And what we’re seeing is that cash buyers/investors are accelerating while actual mortgage purchases are down double digits.
And affordability, because rates are now rising and home prices are up approaching 20% annualized, is really becoming much more stretched. So when you look at all of the inputs today, it doesn’t feel sustainable. And the good news, which there is good news, is that the consumer that does own a home, we’ve seen tremendous equity realization, in fact, including those that don’t have a mortgage, which 35% of homeowners in the United States don’t have a mortgage. About $5 trillion in wealth was created or a little over $3 trillion for those that have a mortgage.
And the other benefit of the pandemic was this realization that I can work remote and I can live anywhere. So we’ve seen what we call the continuation, but on steroids of the great American shuffle because migration out of high-cost states to low-cost states is not a new phenomenon. When you look at household growth by state, even pre-COVID, you had Ohio where I lived for 21 years growing at 2% versus Texas growing at 20%. It’s not a new phenomenon, it’s just accelerated because of COVID. And that migration continues to be a big driver because it’s an arbitrage. If you’re leaving California and you’re selling your $5 million, call it a 3,500-square-foot home, and you can turn around and buy a home in Colorado, 3,500, and you’re paying a big whopping $2 million, whatever the number may be, it’s a great advantage to be able to do so. And that has been a driver of the housing market.
So, just to give you a stat, I was in Arizona last week at a conference and then had an opportunity to sit with 30 industry executives across all of the silos, land developers, municipalities, master plan developers, mortgage brokers, realtors, playing conductor going around the room and hearing their thoughts, they were citing that their incremental demand, probably 40% to 50%, are coming from out-of-state buyers predominantly California and Washington State. And that compares to what had been about 20%. So that’s a real phenomenon, and I think that’s the incremental part.
We call it nonprimary as opposed to just investor because nonprimary consists of a second home buyer who might be looking at a coprimary, a little stickier than private investors looking to diversify and find a hedge against inflation, maybe finding a cash-flowing asset. You’ve got fix-and-flippers, you’ve got liquidity buyers, the instant buyers, the iBuyers. And, of course, we’ve got institutional capital because housing is the prettiest girl at the dance. There’s no question that you look at alternative asset classes, nothing is more compelling relative than residential housing.
Meb: We talk a lot about that. You look at the global market portfolio, housing not just in the U.S., but globally, one of the largest asset classes in the world, but traditionally, one of the harder ones to allocate for the base public market investor globally. But I do feel a little senile because I’m in California and every single one of my friends, they’ll go look at a house and I’ll say, “What’s the over/under going to be on the number of offers that this is going get?” Usually, it’s around 25. So every time we come visit Colorado, we have the same conversations. Why are we living here? Look at this house with some land, a yard, which is a foreign concept in California. And then we go back to California and go to the beach in February and it’s 80 degrees. I’m like, “This is kind of nice too.”
So we go through a pandemic and ready to get into 2022, hopefully, come out of it, things return to normal. And all of a sudden, you have all the craziness going on in Europe and in Russia, which probably accelerated a lot of trends and things going on. You mentioned mortgage rates and interest rates coming up. Inflation is certainly one that’s front-of-mind with everyone. What are you thinking about in terms of these pretty dramatic moves in a number of the macro-factors? Are any of these front-of-mind that you think are going to have particularly meaningful impact? And if so, is it short-term, is it long-term? How do you incorporate some of these shifts that have happened in the last year or so?
Ivy: Well, I think that we have significant uncertainty and it impacts consumer confidence. Today, I think that the level of capital that, again, has invested in residential real estate continues to pour more capital in is waiting for if they can find any dislocation. So it feels like, at the moment, in the near term, it’s just going to continue and potentially see at least within the development side of things, we’re going to see more capital continue to be allocated there. I was just talking with large institutions. They’ve got long-term funds, and they have a lot more staying power than a private investor that assuming that you have an ability to get to the cash flows that you expected or your carry costs are going higher because of interest rates moving up, that might deter some private investors. But I think that this perception that inflation is with us for at least a year or two could continue to drive more people to selling equities and maybe looking alternative investments, including real estate, although it’s very competitive.
So if you look at cash purchasers just over a two-year basis is up more than 40%. And when you look at what mortgage rates are doing today and how much overall originations are being pressured, they’re down double digits. So we’re seeing that investors, again, broadly call it nonprimary equated in 2021 to 26% of the market. And that was up from 19 in terms of transaction in 2020. So we’re seeing that phenomenon. And I think that even with mortgage rates rising, I don’t think that’s going to deter the institutional capital. Probably in ’19 in earnest, we saw a significant amount of capital coming into what is a relatively new asset class for institutions.
We call it the build-for-rent and developing land, driving up land prices, as well as the for-sale developers also buying land predominantly in the third ring or in those tertiary markets. Land prices are up more than 35% nationwide. They’re up a lot more than that in let’s say Arizona and Utah and Idaho and really the more desirable states, Texas and Florida. They’re not up as much as in let’s say Wisconsin or Ohio or Pennsylvania. They’re probably up 10% or 15%.
So we’re seeing significant demand, but the build-for-rent strategy, I think it’s a long-term strategy, and they’re having difficulty allocating their capital. So we kind of track the money and how much has been raised at least that’s been publicly announced. And we’re roughly at $90 billion, which two years ago was nothing and relatively negligible, and that’s predominantly unlevered. So that is part of the upward trajectory on all aspects of what’s driving the market in certain key markets in what we historically call sand states, mild states. Recently, an executive called it the banana states. But in any case, that certainly seems that it’s got some legs to it.
As you look at the Fed talking about the 25 bids that they’ve raised and more to come, there was unanimous with the exception of one governor who thought we should do 50 basis points today. I think we’re going to see more rate hikes, whether that sends us into a recession, which is many economists fear that we’re going to see the metrics rolling over, consumer spending. We’ve talked to a few economists that think that consumer spending’s already peaked. But I don’t think we’re going to see a recession necessarily as much as stagflation.
And the risk is if we tighten continuously, we could wind up putting ourselves in a recession. So I say buckle your seatbelts, it’s going to be rough sailing in housing specifically because the primary buyer when you look at not so much absolute mortgage rates, how much is the monthly payment for an entry-level buyer buying a median-priced home? How much would it cost them today versus a year ago? And it’s up over 30%. And that’s now incorporating the increase in mortgage rates that we’ve seen.
So while the Fed is pulling back on MBS purchases, they’re also tightening. And as a result of that, mortgage rates are rising. And one of the backlashes that the Fed, their policy will be felt, is if you’re not moving from California to a lower-cost state, you’re probably locked in. Seventy per cent of homeowners in the United States are locked in not at 4, below 4. And more than half are locked in below 3.75. And you start to look at what would be the bread and butter of the United States and you say, “Well, okay, these people aren’t giving up that low rate because conventional mortgage, general mortgage, are not transferable.” So I think that might start to dampen the, again, primary activity. Like, can the investor activity offset that? And that’s what we’re seeing right now, that the investors are offsetting nonprimary.
Second-home demand is starting to show a little bit of moderation based on our mortgage survey that we published this week, still elevated, but showing some moderation. We’re watching every aspect of the inputs that go into what, ultimately, will determine where we are in the cycle. Ukraine and Russia, I think most people are just, “That’s not my problem. Game on. Business as usual.” I don’t see that that’s having an impact on the day-to-day activity as of yet.
Meb: As we look around y’all’s space, it’s a pretty traditional world. You have seen a number of “disrupters,” people trying to innovate in the broad real estate space, not just housing. You referenced one being the iBuyers. Are there some factors at play that you think are fairly material? Do those play into your thesis at all, or are they a rounding error after-thought? And anything else you think is something you think may not look like the past with the whole asset class?
Ivy: Well, I think in some positive ways, we can talk about the innovation that has been provided to consumers, the iBuyer image, and just think about as a mother of three children, if you have to clean your home and get it ready to show and maybe paint the home inside, maybe fix up the kitchen, the bathroom, or put new carpet in, it’s kind of a pain. So if you are able to sell it to a buyer in three days for cash and that offer is pretty attractive, may not be as high as you get if you waited it out for the 25 bids you mentioned or more. Also, they’ll probably charge you for whatever repairs that they said they need to do. That’s a convenience that I think creates a nice niche for those that really need that liquidity quickly.
But in terms of aspects of the market that’s different today, we have significant institutional capital looking to create single-family rental platforms. There already are two publicly-traded companies, American Homes 4 Rent and Invitation Homes, and maybe more coming down the pike. There’s some public builders that are doing build-for-rent and also providing rental housing, which is for those that want flexibility or just can’t get mortgage approval. So that’s becoming a bear per cent of the market. And I think you even have iBuyers selling directly in escrow to SFR, single-family rental operators. And single-family rental operators are buying directly from the builders. So it’s really another incremental part of what’s driving home price inflation.
And I don’t know how innovative it is, but the services that the single-family rental operators provide versus what historically would be a mom-and-pop industry are really better for the consumer in terms of 24/7 service, having automation, whether it’s within security or whether it’s technology in the home, smart homes that are really allowing people to have access to things that they’ve never before had. I think those are some positive things. You can buy homes online and do it virtually. So if you so desired, you can also even go through a mortgage process online. So there are a lot of things that young adults today are so used to holding their phone and doing everything on their phone. Now, they can do a lot of that to acquire a home and finance a home.
Meb: I had done a post on Twitter because I thought that was totally insane. I was talking to some friends who were putting in bids on houses they never even viewed. And then much to my surprise, the vast majority of people are like, “Yeah, I’d totally buy a house I’ve never set foot in.” And I’m like, “Are y’all crazy? No way.” I was trying to find the exact number. I’ll add it to the show notes for listeners. I know you can’t name specific names, but are there any particular areas that you guys look at that you think are more attractive, run away screaming, hair on fire, unattractive? Anything in general that you take a look at ’22 and say, “All right, here’s some things we’re pretty interested in or we think you got to be pretty cautious about”?
Ivy: I think that the positive would be home improvement, thinking about the fact that it’s difficult to secure the materials, and there is significant inflation. But there are people who have made so much money in terms of realizing all the home price of inflation we’ve seen. So there’s a lot of cushion in the market. And people feel better when they…just like when they get the 401(k) statement, they like to know that their home is up 50% or more, and they feel better about maybe doing rehab. Maybe they won’t sell their house because they have it locked in at a low rate. So I think that home improvement will prove to be somewhat counter-cyclical. I think the fix-and-flip business is one that we like that tends to be an opportunity to take some stock. Especially whether it be east of the Mississippi, we have a much older stock versus west of the Mississippi with the exception of California, a little bit older.
But you’ve got 45 years plus on average is the age of the stock. So a lot of homes need refurbishment. That’s an area that I think will relative to maybe not where a pandemic level of home improvement has been this period, the last 12 months has actually soared to, because think about all the cloudiness of people having excess savings through stimulus that they’ve put away or excess unemployment benefits, or they didn’t pay their student loan. A lot of people, unfortunately, might now get foreclosed or could get evicted that were otherwise being allowed to stay in physical occupancy.
So those benefits could start to free up some inventory. We do have the view that the mortgage industry is challenged. There are a lot of mortgage originators today that are seeing significant pressure on their gain-on-sale margin. And while there’s going to be winners and losers, no question, I think there are many players in the market that might not be around. The refi market is just getting plowed right now looking at refi’s down more than 50%. And purchase volumes are also under pressure because of the fact that we have so much of that primary buyer’s challenge to compete with that cash buyer. So I think that’s part of the ecosystem is feeling the pain right now.
And we caution that sustainability of overall profitability tied to new construction and recognizing the growth is going to continue into ’23 because we just can’t get these homes closed. There’s a lot of inflation in the inputs including land, labor, and materials. And I think that that might start to not show us a GFC type of correction, but ’23 potentially and beyond, we could see more of the cyclicality impact profitability. But a lot of the startups and VC-funded operations that are trying to disintermediate and provide innovation, the capital is more expensive. Are they going to be able to have the staying power necessary to continue to fund their operations? But those are some of the things that I’d share with you as the things that we’re thinking about.
Meb: How much do you guys think about housing and real estate in general outside our borders in the U.S.? Is it something you guys have paid much attention to, or is it anecdotal? We’ve got a lot of Canadian listeners that are consistently bewildered or just amazed at what housing does in a lot of their locales over the past few years seemingly just going straight up forever. Do you guys think about it at all, or are you just mainly domestic-focused?
Ivy: Mainly domestic-focused watching on the peripheral. Obviously, we can look at the GTA and the Greater Toronto Area and see the magnitude of investors has continued to allow for soaring home prices despite the lack of affordability. Obviously, see what happened in China with their residential market that’s imploding, which was really overbuilt, a lot of ghost towns there. So Western Europe in thinking about is much more a renter nation, just given the lack of affordability. So is that the direction that the U.S. is headed? I think the difference in the U.S. versus Western Europe is just the lack of, in Western Europe, the land, whereas here, we have land, and land we’re sprawling as we always did.
I remember when I moved to Washington, D.C., the metro area out near Dulles Airport, people thought I was nuts leaving New York to live where the cowboys and Indians are. And now, Dulles Airport 30 years later is an A location. So I think we’re sprawling, and we have the benefit of sprawl. And I think that the markets that are the most desirable, where you have low-cost states like Texas and Florida will continue to outperform those states that are not as favorable in climate and cost.
But there could be corrections more likely in those markets. It might be mini-corrections. And assuming investors get nervous, we start to see the lack of ability to drive to qualify out in those markets, whether it’s gas prices or just lack of primary buyers that are willing to take on more significant costs in mortgage. So I think the supply side drives the market. And there is no question investors are also infill or in the first or second ring too. But it’s supply ultimately in these outer rings that could create some mini-corrections. A longer answer, but only watching on the peripheral. We’re focused domestically.
Meb: Well, while we have you for a little bit longer, I’d love to touch on a couple topics in the book, a few quick questions. They can be long answers. But you opened the book talking about aspirations as a young person and wanting to buy Mattel. Did you ever end up buying the stock? Can you now say, “I own a few shares”? I don’t even know if it even trades anymore.
Ivy: No, I didn’t buy Mattel.
Meb: What was your first stock? Do you remember?
Ivy: Actually, Texas Instruments. I bought a company called BBRC. It was a ticker, Burr-Brown. And that was one of my first. And also, I remember Jerry Rice had a nose patch to help him breathe better at night. That was the two stocks that I bought in my late 20s that allowed for me to buy an apartment in New York that was really the first residential purchase.
Meb: Amazing. Well, Mattel’s still trading, by the way. M-A-T. So you should pick up a few shares
Ivy: For nostalgia.
Meb: One of the big themes from your book that I think is important in our world that seems to be a defining thread for you is this concept of mentorship and how it’s important. Tell us a little bit about how you think about it. What are some of the things that you think are important takeaways from that concept in general?
Ivy: I think you have to be willing to ask for help, the opportunity to chat with your professors, friends of your parents, those that are in your inner circle, and just step up and see if they’re willing to talk with you about their career and how they got where they’re. Are they happy? I think I’m quite an inquisitive person. It suits me well to be in the research seat. But I think when I worked at Arthur Young, if anyone remembers Arthur Young, back when I was in college, I was going to night school funding my own education. And I was majoring in accounting. And that was the safest place to go. And I’d ask all these accountants in Western Virginia, “Do you like your job?” And they would just say, “You know, Ivy, I don’t think this is for you. You’re not going to be happy doing accounting.”
And I think that just asking people about their experience, what they like to do, what they don’t like to do, and getting a hodgepodge of responses will better inform you. But I think that networking starts with asking people how they’re doing, talking to people as you would talk to your friends, and try to start conversations that you can find a way to connect. One of my mentees, Elizabeth Simms, who’s interviewing at a big, large institutional client of ours who was a summer intern for us last summer, she’s interviewing, and she’s like, “What should I ask? What should I ask?” And I said, “Just try to connect on something. If there is questions you have for them about how they got where they are and where did they grow up, what kind of hobbies do they like to do, find a connection.”
Even when I talk to young people and they don’t have children, they might be younger professionals, they might have gone to a big 10 football school and I’m, “Oh, you know, I went to so many Buckeye games,” or opposite, I’m young and talking to someone more senior, and I’d say, “Oh, do you have any children? How old are your kids?” And, “Oh, you know, I have nieces and nephews.” And just a way to bond with them on a personal basis before you get to the business aspects of what you’re hoping to achieve. I think it’s really important to have that personal connection. And that’s really served me well. That’s what I try to convey to my mentees and do a lot of volunteer work, whether it be at high schools where my children attended or working with universities and talking about my experience, especially being a woman in a male-dominated field on Wall Street as well as in the housing sector.
But we’re seeing more women at least within the housing market that are starting to take more senior roles. So I really want to pay it forward. And I think it’s important that we all do that, those of us that have had successful careers to work with people that are ambitious. But you have to be passionate. I don’t really enjoy chasing a mentee down. I won’t, frankly. If anything, it’s up to the mentee to come to me. And I think that I lay that out pretty clearly to them. That’s the best advice I can give you as it relates to ways to network. And never be afraid to ask questions and ask for help.
Meb: To me, to echo that, realize you know nothing and not being embarrassed about it I think going into all of this, none of us, usually 20 or 18 or whatever have any idea what’s going on. Being willing to just have no embarrassment and ask lots and lots of questions as dumb as you think they may be.
Ivy: And also, look people in the eye, shake their hand, and be responsive in terms of post-interview or post-meeting, even if it’s just a family friend. Write them an email. Thank them immediately. We have interviewees that we may not hear from at all. and that’s a ding. You know, having people that have a weak handshake. I don’t want you to break my hand but…
Meb: I mean, it’s not a handshake anymore. Corona, it’s like a foot tap or elbow palm.
Ivy: I think we’re getting back, I hope.
Meb: We’ve talked a lot about this in the podcast in the past, thinking about approaching, for the young ones listening, a career in getting a job, we’re talking about chasing people down. A lot of the outreach is so much about them and when it’s really 180 degrees the opposite is when you’re interviewing or wanting to talk to someone, it’s really what can you do for that person. And I think that’s a number one mistake we always see. Other than the basic, what you’re talking about is email, hello, comma, I’m looking for a job sort of thing. This is the beauty of being a podcaster is you can always ask lots of dumb questions and get away with it. No sweat. Ivy, as we look to the horizon, you’ve done a lot. What are you thinking about? Anything got you worried, anything got you excited as you think about housing or just the financial markets in general, or are you sleeping pretty sound right now?
Ivy: I don’t know that anybody can sleep pretty sound right now when we have a war going on. But I do think that I’m looking forward to really giving back and possibly guest lecturing at universities, working with Walker Dunlop to find synergies and drive growth, and on a few boards. So utilizing my expertise where opportunities exist, but focusing on getting my three children launched into life. So a pretty full plate.
Meb: So as you look back, and we usually ask this question one way, but considering you’ve been on the research and sell-side, you can pick and choose. What would you say’s been your most memorable investment? But you can answer it as what’s been your most memorable housing story or moment throughout your career? And this could be good, it could be bad, it could be anything in between. But anything that sticks out as a particularly branded memory on your brain?
Ivy: I think the period that we already referenced with respect to when New Century went bankrupt. My son always asks me, “Mom, did you ever get to a point…?” He’s 19 and attends Rice University. “Did you ever get to a point where you really felt vindicated?” I think that that point on from March of ’07 through starting the company, and you can’t sleep because you want to work, and reading the paper, you couldn’t wait to reach the newspaper. It sounds almost foolish, but you wanted to see what was going on, who fell today. And it was just such a unique, incredible time in my career. But I think that, you know, that was such a intense, passionate period really ’07 through ’08, very memorable and good and bad. I had three little kids that were 4, 6, and 8. So trying to balance all of that, maybe a little bit longer than one moment. But that period, pretty unique.
Meb: It certainly was. My goodness. Listeners, pick up a copy of her book. We’ll add it in the show note links. Ivy, if people want to follow what y’all are doing all the way up from institutional investors, sovereign funds, all the way down and they want to check out y’all’s work, where do they go?
Ivy: Check out our website, zelmanassociates.com. We do have some free access for our newsletter and our blog portal. I’m not doing a lot of social media. As a mother of three, I’ve been staying away for me personally. No judgment on doing anything on Twitter or Instagram. But when I’m not working full-time, maybe I’ll start doing a lot more Instagram. I really enjoy providing insights on financial literacy. I think that the stock market is very intimidating to many. It’s not part of their day job, especially women that I interact with, whether it be nurses or doctors, even professionals. I can’t do brain surgery or heart surgery, but I certainly can talk about how to think about valuing companies. And it’s fun for me to do so. So I think in the future, I’d like to have maybe some type of video programs on Instagram and doing more to give back in that way too. I did a little bit of that as I talk about in the book, but that’s something that I think I can add value on.
Meb: Cool. Well, you got three kids that can help you set up your TikTok account when you’re ready for it. Ivy, it’s been a blast. Thanks so much for joining us today.
Ivy: Thank you.
Meb: Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcasts. If you love the show, if you hate it, shoot us feedback at feedback@themebfabershow.com. We love to read the reviews. Please review us on iTunes and subscribe to the show anywhere good podcasts are found. Thanks for listening, friends, and good investing.
