Walker Webcast: Ivy Zelman Sees Pricing Challenges for Homebuyers and Homebuilders

Ivy Zelman’s third appearance in the Walker Webcast series coincided with reports of steeper-than-expected declines in May new-home sales, along with the fourth consecutive monthly decline in existing-home sales. Industry analysts cited a combination of limited supply and rising prices, and while Zelman sees some relief coming in the form of new-home deliveries, she also sees a lot to be concerned about with regard to pricing.

“Today’s buyer is definitely challenged” on affordability, the Zelman & Associates founder told Walker & Dunlop CEO Willy Walker. Single-family home prices will continue going up into 2022, Zelman said, although the rate of increase will moderate.

However, homebuyers aren’t the only cohort faced with rising costs in the current residential environment. Builders are experiencing increased cost pressures on every front: materials, labor and land. 

Given that homebuilders’ projects are conceived, entitled, completed and sold over an extended time horizon, “they have to make assumptions: what will the pricing be? What will the pace be?” Zelman pointed out. Under the circumstances, she predicted that a number of them will soon be hard-pressed to hit their returns.

Until then, builders have little choice but to pass those rising costs along to the ultimate consumers of their projects. However, at some point, said Zelman, the retail-level markup to homebuyers “will not be sustainable.” Further, she noted that much of the new supply isn’t aimed at the segment where it’s really needed: workforce housing.

Zelman & Associates’ coverage universe runs to 44 companies across the housing spectrum. Asked which segment of that spectrum she likes at the moment, Zelman said she’s seeing more opportunity on the home-improvement side. “As you think about the possibility of rates moving higher, people will be disincentivized to move,” she said.

Single-family builders as well as institutional owners/investors are seeing plenty of opportunities in the build-to-rent space these days. For these builders, the BTR space is an “attractive” place to be with its promise of an annuity stream, said Zelman. 

However, she noted that companies operating in this space are facing many of the same challenges as they confront in the for-sale market, and she questioned whether the current lease-up and rent-growth rates in BTR and single-family rentals were sustainable.

If supply of for-sale single-family housing is limited, then the opposite is the case in many rental apartment markets, where continued deliveries amid the pandemic exceeded demand. That being the case, Zelman acknowledged that multifamily remains a favored asset class for investors seeking to deploy capital. 

“There’s very significant institutional capital that has to be invested,” she said. As an investment advisor, Zelman said, “We would prefer to be on the sidelines for the multifamily nams.”

On-demand replays of the June 23 webcast are available by clicking here and through Walker & Dunlop’s Driven by Insight podcast series.