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Housing market 'could see a pretty substantial slowing': Zelman & Associates CEO

Zelman & Associates Co-Founder and CEO Ivy Zelman joins Yahoo Finance Live to discuss the housing market heading into the Fed's interest rate hikes, supply concerns, inflation, and mortgage rates.

Video transcript

AKIKO FUJITA: Welcome back to Yahoo Finance Live. The expectation for a March rate hike from the Fed has led to a feeding frenzy in the housing market. So many potential homebuyers looking to buy ahead of those hikes. Our next guest called the housing market peak back in 2008 and now says she's starting to see some warning signs in the market. Let's bring in Ivy Zelman, Zelman and Associates co-founder and CEO. Ivy, it's good to talk to you today. Talk to me about what you are seeing right now. It feels like there's a lot of FOMO that's setting in. How frothy do things look from your end?

IVY ZELMAN: Well, thank you for having me. Overall, the housing market has been accelerating and actually, which is hard to imagine, because it was already pretty red hot, but because of the anticipated back-up in mortgage rates, you do see a lot of fence sitters. It's usually three months that you'll see a pop in overall activity that then starts to diminish. But I think assuming rates go higher from here, we could see a pretty substantial slowing in the market that we're anticipating, not contingent on rates rising, but really, the bigger factor we're worried about is the level of supply that's right now being governed by supply chain bottlenecks.

But there's a massive backlog of both single family for sale, single family for rent, what we call bill for rent. And there's a massive pipeline of multifamily that if that-- all that product gets completed over the next year and a half, two years, we're going to have oversupply causing pressure on home prices. And that's aside from the risk that rates are going to go higher. But happy to drill in a little bit on the rate increase and what it will mean if you'd like.

AKIKO FUJITA: Yeah, let's talk about that a bit. Because if you think about where things stand right now, it kind of feels like the perfect storm. Number one, there's the concern about get-- you know, buying a home ahead of those rate hikes. But also inventory is just so low, so there's not a lot to buy. How much of that do you think starts to balance out once we see that first rate hike in March?

IVY ZELMAN: Well, first, you have to keep in mind that a lot of the momentum we're seeing incrementally is coming from non-primary buyers. And that is a basket of investors that are private investors looking for diversity from the stock market that plan on buying homes and renting them out, people that are trying to create cash flow income. You also have cash flowing assets. You also have second homebuyers. And you also have institutional capital, fix and flip investors, and what we call liquidity investors like the iBuyers. And they're competing right alongside the primary buyer, and in most cases, upfront are using cash.

So that momentum has been accelerating really the whole second half of 2000, the last six months of 2001, and accelerating into 2022. And so the primary buyer, if you recall back in pre-COVID, inventories were at all-time tight levels. But housing home prices, a good year would be up 4%, like '19. So we went from 4% to up nearly 20%. And I think a lot of that was primary buyers in the market, a lot of who we pulled forward.

But when we get to a mortgage rate, let's just say theoretically that we start to see a 30-year fixed mortgage rate as high as 4%, we have about 70% of homeowners in the United States that are already locked in below 4%. So if you're locked in at 3, and rates are now 4, it's a big disincentive to move. And we've seen this happen in the past. In 2018, mortgage rates went from 4 to 5 from the beginning of '18 to the end of 2018. They were at 5, and the housing market came to a screeching halt.

You also have the risk of the wealth creation that we've had in the market-- stock market, whether crypto, equities. A lot of people are attempting to diversify, taking money off the table and investing in residential real estate. And they plan on renting out those homes. So I think the mortgage rate increase will really hurt the primary buyer. Will it slow the investor is another story. That might have to wait for fundamentals to really be impacted by the incremental supply and the pipeline we see coming.

AKIKO FUJITA: To what extent have the investors coming into the market pushed housing prices even higher? To your point, there's a lot of new wealth that's been created. There's, number one, the investors who are coming in, saying, look, if you consider just how choppy equities are, there's a better, more stable investment here in property. You've also got new wealth that's being created through crypto and other assets. How much has that-- you know, the increase of those buyers, how much have they pushed prices higher?

IVY ZELMAN: Well, to just give you some perspective, when you look at historically the trend line of renters that convert to home ownership, pre-pandemic for three years prior to the pandemic, it kind of ran about 2.3 million. And by the end of fourth quarter, first quarter of '21, we got to over 2.8 million. Now that number has moderated back down to, like, 2.4 million. So when we look at the incremental demand, we know that that's coming from an investor that was, call it, 20%, 21% of the market that's now 26% of the market. And that's not necessarily including all the cash buyers that we're seeing.

So I think to think about the surge in pricing, it's very difficult to quantify for you. But we know the impact is moderating renters relative to the peak are being offset by that momentum from the investors. So I would have to guess, if I was guessing to try to correlate the increase in home prices, I'd say it's a pretty substantial portion of the surge, at least within the dynamics that you're excluding the primary buyer.

The second homebuyer has also been a big part of this market in the last two years. And one would argue maybe the second homebuyer is a little stickier because they might be truly looking for a vacation home long-term. But do they start to get nervous if home prices are hitting a wall, they've made a ton of money, and they decide that they want to sell now and take their chips off the table because RESI is slowing? So I don't know if that really answers your question, but I think it has been a disproportionate part of what has resulted in the surging home prices we're seeing.

AKIKO FUJITA: So Ivy, what do you tell primary buyers who are looking right now, who are saying, look, I kind of want to take my time a little more. I feel like I'm getting pressured to buy because those rate-- that first rate hike, at least, is coming. Is there-- I don't know if value is the right word, but should they be waiting, or should they rush in right now, even with low inventory because waiting for those hikes and the price after those hikes will push things even higher?

IVY ZELMAN: Well, you know, I'm a mother of three. And I can tell you that if you need more space and your current situation, you're paying in rent what would arguably be more than what your monthly payment would be if you were to buy today, then I think you have to make a transition. But if you're not sort of in a have to move mode, then I wouldn't because when you look at first-time buyers today, there's going to be a ton of product available coming. And they call it the winter's coming.

But we have a backlog that's at 2007 highs in single family. If you go into the southwest, southeast portions of the mountain states, the pipeline is massive. And when builders build all these homes, whether it's for sale or for rent even, there's going be a lot more choices. So I would be more patient unless you have to because you're just busting at the seams, and you can't get-- your family is just too big for your home. And again, the monthly payment on a relative basis, rent versus own, should be how you're thinking about it.

AKIKO FUJITA: Some good takeaways there. Ivy Zelman, Zelman and Associates co-founder and CEO, and author of "Gimme Shelter, Hard Calls and Soft Skills from a Wall Street Trailblazer."