Famed analyst Ivy Zelman called the housing market bubble in 2006. She says there’s an

Seventeen years ago, Ivy Zelman turned heads by challenging one of the most powerful people in real estate: Robert Toll, the co-founder and then-CEO of luxury home builder Toll Brothers.

“I’m wondering which Kool-Aid you are drinking, because I want some,” Zelman, then an analyst at Credit Suisse, said to Toll regarding his optimistic outlook on a conference call in late 2006.

A few months after that infamous remark, home prices began to fall in the beginning of what was later known as the US housing market bubble. Zelman left Credit Suisse the next summer, and by October 2007 she had co-founded research firm Zelman & Associates, where she’s still the CEO today.

Home prices fell shortly after Zelman made waves on a buzzworthy Toll Brothers conference call.

Federal Reserve Bank of St. Louis

Since founding her firm, Zelman’s housing market calls have been spot-on. She became optimistic about home prices in late 2011 as the housing market recovered, and correctly predicted a pullback for the market a decade later.

Home prices receded in the first half of this year after hitting a crescendo in late 2022, but have since bounced, in part because the economy held up much better than anticipated. That resilience initially caught Zelman off guard, though she’s now ready for even more price gains.

“The real surprise has been the strength of ’23,” Zelman said in a recent interview with Business Insider. She added: “Pricing being up 5%, 6% in ’23 is kind of shocking in the context of recessionary transactions, but it’s really been still a very robust economy.”

What to expect in the housing market in 2024

Heading into 2024, Zelman is upbeat about the state of US real estate. She said home values will rise further next year as sales pick up due to a continued decline in mortgage rates.

“We are starting to see affordability improve dramatically,” Zelman said. “I think that you can expect, in our opinion, to see home prices continue to accelerate, but at a more modest level.”

Property prices will likely rise 1.5% next year and another 2% in 2025, Zelman said. She believes home sales growth of 5% in 2024 and 8% in 2025 will enable those slight gains, while the typical 30-year fixed rate mortgage ticks down to 6.4% next year and 6.1% in 2025.

A recession would force Zelman to recalculate, given that it would result in layoffs that inhibit people’s ability to buy property. But as of now, an economic downturn isn’t part of her thesis.

“Our expectations are really based off of sort of assuming that we’re in a somewhat status-quo economy where we’re not seeing significant job destruction,” Zelman said. “We’re seeing what Jerome Powell orchestrated — basically a soft landing, but with, again, having jobs still prevalent and therefore, demand’s still pretty good.”

Watch for a big real estate reversal — but don’t panic

There are no major surprises in Zelman’s two-year outlook for US real estate, considering many of her contemporaries are also calling for higher home prices and more transactions as mortgage rates slide. She believes homeowners and buyers don’t need to worry about a market meltdown.

However, Zelman is keeping her eye on an overlooked dynamic in the housing market that may eventually cause a stir: the potential for a home supply glut following a long-term shortage.

Before the housing bubble burst, the supply of US homes soared dramatically. The ensuing collapse gave homebuilders pause, so for the last 15 years there’s been a severe supply deficit that’s pushed property prices steadily higher.

Builders are scrambling to play catch-up by breaking ground on more homes and starting specs — or speculative housing projects built without an order — at the fastest pace since 2007, Zelman said. Her hunch is that homebuilders may go overboard once again, causing supply to outpace demand. That would lead to fewer home sales and downward pressure on prices.

Zelman & Associates

“When builders and the industry and the NAR and everybody talks that we have a housing shortage, the question is, what demand number are they using?” Zelman said. “And historically, 1.5 million units of demand would be needed, and therefore, you need to build 1.5 million single-family homes to match the incremental households.”

Zelman continued: “The problem with that is that the 1.5 million households is the wrong number now. So we would dispute the shortage, based on the household growth deceleration that’s coming from the deceleration of population growth.”

The world’s population is getting increasingly older as people live longer and birth rates decline, and the US is no exception. Advances in medicine have increased life expectancies, while shifting social, cultural, and financial trends have led many young people to delay or forego parenthood.

Three summers ago, Zelman’s firm projected that US population growth would slow to 4% after hitting 7.4% in the 2010s, based on the nation’s immigration, fertility, and death rates. The implications of that shift for the housing market are clear.

Zelman & Associates

“If your population growth is getting cut in half over the decade, your household growth is going to be negatively impacted,” Zelman said.

Older populations tend to move less frequently, Zelman noted, which may translate to fewer home transactions going forward. And if there aren’t as many young people raising families, demand for single-family homes should soften. The result may be a quieter housing market.

“With the slowing turnover and longer-term demographic headwinds and mobility slowing, I think it’s going to be a fairly benign, boring type of environment,” Zelman said.

Another key component of Zelman’s call — as macabre as it may be — is an accelerating mortality rate. By the end of the decade, her firm projects that deaths will put 2.2 million homes on the market per year. That often-overlooked form of a supply increase won’t take down prices anytime soon, but it could give homeowners a headache, especially if homes keep getting built.

Zelman & Associates

“I’m not looking for home prices to plummet because deaths are rising — the numbers just aren’t that big per annum, they add 50,000 to 100,000 per year — but it’s going to be a headwind,” Zelman said.

Zelman’s call is similar to that of Meredith Whitney, who was dubbed “the Oracle of Wall Street” for her timely warnings about the housing market while working as an analyst at Oppenheimer. This autumn, Whitney also said that shifting demographics, including an aging population, will undo the home supply shortage and create a surplus that eventually leads to lower property prices.

This article was originally published by a www.businessinsider.com . Read the Original article here. .