On paper, the housing market has never looked more solid. Single-family homes across the country are in high demand, with home values growing, on average for the nation, nearly 20% year over year. This record growth is thanks to a number of unique factors, including today's low-interest-rate environment and insufficient housing supply.
According to Freddie Mac, around 3.8 million housing units are needed to meet demand due to years of underdevelopment following the Great Recession. But one expert believes the housing market isn't nearly as strong as it seems and that we aren't in a housing shortage, but rather in a position of overproduction potentially putting the market we know at risk for a correction.
An opposing belief to a strong housing market
The contrarian is real estate analyst and expert Ivy Zelman, CEO of Zelman Associates. Ivy is commonly praised for her years of experience and accurate predictions within the real estate market, including pinning the peak of housing prices back in 2005, prior to the Great Recession. And right now, Ivy thinks the housing market is sitting on a bed of lies.
In an interview with The Real Deal, Ivy stated she believes the real estate market is in a position of oversupply and that demand is actually around 21% below current deliveries, which as of August 2021 equated to 1.15 million housing starts for the year.
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Why she believes the real estate market is falsely elevated
Zelman states that accurately estimating the future supply of homes is extremely difficult because of private equity firms. Homes purchased by large investment firms aren't always factored into the supply chain, although their homes certainly deliver much-needed housing units to the market. Among many others, these include homes bought by the largest single-family rental REIT, Invitation Homes (INVH 0.49%), and one of the largest single-family rental operators, Blackstone Group (BZ).
Secondly, Zelman believes the low-interest-rate environment is falsely propping up the housing market and creating unnatural demand, pushing prices up to unsustainable levels. According to her belief, when interest rates increase or home and land prices reach a breaking point, the buying frenzy will stop, and the market will quickly reveal that there is more supply than initially believed.
So why hasn't the market imploded?
Zelman believes the realization of oversupply hasn't come to fruition because of supply chain issues bottlenecking housing deliveries and new starts. Increased costs for labor and products, inflation, and labor shortages have certainly slowed construction completions and raised costs for investors, making some companies think twice about starting new developments.
Zelman is one of the few real estate experts openly stating this contrarian opinion about the market. Most other analysts would argue that the market is in one of the strongest positions it's ever been in, and storage is a very real issue. Homeowners are certainly in a better financial position than ever before, given the amount of home equity gained in the past year. Underwriting criteria since the Great Recession have also strengthened, meaning the quality of the borrowers is stronger. However, 4% of homeowners are still in some stage of delinquency.
Right now, there is a lot more data supporting the strength of the market over Zellman's opinion. But just because there is an opposing view doesn't mean it's invalid. Many people adamantly disagreed with Peter Schiff, CEO of equity firm Euro Pacific Capital, who publicly and accurately predicted the housing crisis of 2008. The housing market does appear to be as strong as it seems, but time could reveal that it was all just smoke and mirrors.
