Ivy Zelman, CEO of Zelman & Associates.

Ivy Zelman, CEO of Zelman & Associates, joined us on the podcast to discuss the current housing market, her unique research methodology, and where the housing market is headed.

As Chief Executive Officer of Zelman & Associates, Ivy Zelman, holds roughly 27 years of experience covering housing and housing-related industries. Founded in October 2007, Zelman & Associates provides analyses across all aspects of the housing spectrum. Ivy’s concept for the firm remains strongly rooted in the ability to perform thematic research overlaid with proprietary surveys to produce unparalleled differentiated value-added research.

Ivy continues to be frequently quoted in The Wall Street Journal and appears occasionally as a guest on CNBC. For the past 22 years, Institutional Investor has recognized Ivy as one of the most preeminent figures within the housing industry. Most notably, Institutional Investors – America
Research Team rankings placed Ivy and her team with eleven 1st place rankings (1999 – 2004, 2006 – 2007 and 2010 – 2013). Ivy achieved this record over the years, most notably when she called the top of the housing market in 2005. In addition, she reinforced her dominant reputation in the industry by calling the bottom of the housing market in January 2012.

Ivy received a Bachelor of Science from George Mason University and currently lives in Cleveland, Ohio with her husband David and their three children, Zoey, Zachary and Zia.

Ivy’s Links

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Transcript

RealCrowd – All opinions expressed by Adam, Tyler and podcast guests are solely their own opinions, and do not reflect the opinion of RealCrowd. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. To gain a better understanding of the risks associated with commercial real estate investing, please consult your advisers.

Ivy Zelman – As our millennials age, they’re going to look for the American Dream and they’re not going to act any differently than prior generations. The one variable is price, because affordability does come into question whether you’re going to have to rent that home or whether you’re going to own that home.

Adam Hooper – Hey Tyler.

Tyler Stewart – Hey Adam, how are you today?

Adam Hooper – Tyler, it’s another beautiful day here in the podcast studio.

Tyler Stewart – It sure is.

Adam Hooper – In the RealCrowd offices.

Tyler Stewart – Absolutely, and we had a great guest today.

Adam Hooper – We did. Who was it?

Tyler Stewart – It was Ivy Zelman, Chief Executive Officer at Zelman and Associates.

Adam Hooper – Ivy is a pro, she is 100% pro. Known for ringing the alarm in 2005, ’06 and ’07 calling the housing crisis, and also called the bottom in 2012. So they’ve had a pretty incredible track record on the analysis side for public companies, housing, supply related companies, everything in that space. So wonderful to have her on today. Really, really awesome conversation. Talked a little bit about their methodology, some of those factors they look at, I think a really interesting conversation too around demographics that we haven’t necessarily heard that view from them.

Tyler Stewart – Yeah, yeah and she knows her research. Institutional Investor ranked her number one in the country 11 times for her research on the housing market.

Adam Hooper – Yeah, so again. Super, super good information here folks. We’ll talk about some of the reports that they put out, how you can access those. There should be some links in the show notes for you. Stick around to the end too ’cause we talked about a few, few little bits at the end there that are really interesting indicators that they also research we didn’t talk in the body of the show. So good news is hopefully we’ll be able to have Ivy back on here in the not too distant future and dig in on some of those reports as well.

Tyler Stewart – That’s right, yeah, this is a great episode. Another one of those where yeah, you want your pen and paper ready to take some notes and might give this one a couple listens as you go through all the material that Ivy dives into.

Adam Hooper – Absolutely, so again as we said links in the show notes. Certainly check out their research. If you have comments or questions, we’d love to hear your feedback. Write to us at podcast@realcrowd.com and with that Tyler, let’s get to it. Well Ivy, thank you so much for joining us today. We’re super excited to talk about everything in the housing market and hear what you’re up to with the latest research. So thank you for taking the time today.

Ivy Zelman – Thank you for having me.

Adam Hooper – So listeners that may know you, may not know you, you’ve got a pretty interesting background, starting on the Wall Street side, getting into the analyst side. And you’ve made some pretty interesting calls in your past. So why don’t you take us back to the beginning. How did you get into I guess finance to begin with and then ultimately into real estate as your expertise?

Ivy Zelman – Sure, I think going down memory lane, you go back to the days in college where I was studying and I was an undergrad at George Mason University studying accounting. Actually I went to night school unfortunately ’cause I had to pay for my undergrad. And I was working full-time as a secretary at an accounting firm that everyone knows as Ernst and Young but at the time it was Arthur Young. And while I was pretty convinced accounting was the path I was choosing for my career, as I learned from a lot of my fellow colleagues that they hated their jobs. So as I was studying accounting, I was like oh my God, everybody I know that’s an accountant hates their job. So I started asking people within Arthur Young well what should I study, what should I do? And they said you should go work on Wall Street and I also had one precursor to any career path. I may be embarrassed to say this but I wanted to make a lot of money, that was my goal. And I certainly was ambitious in that respect. And when they told me that I should go work on Wall Street, I really didn’t even know what that meant and was incredible novice to say the least. And they started giving me some indications, that’s where everybody makes all the money. And so I started asking anyone I knew if they knew any firms on Wall Street, and I started doing what I call information interviews where I’d meet with various companies that were large investment banks at the time. They were clients of Arthur Young’s and started to realize that this is a career, I wanted to be an investment banker.

Ivy Zelman – So the aspiration, I was dedicated, reading every book I could, meeting anyone I can and eventually got a job at Salomon Brothers as a two-year finance analyst working in the investment banking corporate finance area. And like most things, I was thrilled beyond. You can imagine first of all Wall Street doesn’t recruit at George Mason, so I was actually like featured in the George Mason newsletter because it was such a big deal to get a job at Saly at the time. And after working there 100-hour weeks and being a grunt and sitting in front of my computer and having late nights at the printer, 24-hour nights, it was not the job for me. And I was pretty devastated realizing that I really didn’t like doing what I was doing. So as I recognized that my two years was ending and I was going to be back out there, most of the call it 70 odd students or post-college employees that were in my class they would go on to get their MBAs. And I actually would have gone to get my MBA but frankly I applied to Harvard, Stanford and Northwestern and I didn’t get in even though I was I think, a very good candidate. And then I said well now, I just need to get a job and pay my rent. And I actually asked the analysts from Equity Research that I worked with in the transportation team if he can help me. He recommended me for a associate job in Equity Research working under the housing analyst. And this was a time when Salomon Brothers had just kind of gone through a Treasury scandal that resulted in John Gutfreund stepping down as our CEO.

Ivy Zelman – And the opportunity to be in equity research was something that a lot of people in investment banking frowned upon but the opportunity was in housing and Bruce Harding who was my boss, and he was at the time doing the firm a favor picking up the homebuilders ’cause the analyst at the time quit, thinking Salomon was going down, I took the job and frankly that’s how I started my career at Equity Research focusing on housing. But frankly, to be honest with you, I was just really looking for a job so I could pay my rent and had no idea what I was getting into.

Adam Hooper – Well, it sounds like that was a pretty fortuitous turn there ’cause you’ve done pretty well in the space. So it just started out of just happenstance, I guess, but then how did that grow into what it is today? I mean did you just kind of fall in love with the sector? Is it something that you’ve identified, a way that you have like a unique look on or how did it go from this first job into the housing space into what you’ve built with Zelman Associates?

Ivy Zelman – Well, I think first, I really loved the eclectic nature of being an analyst from the aspects of the job that I didn’t have in investment banking where you had many different responsibilities from writing to modeling to really being a salesperson and getting to interact with management teams at the C-suite level, where you’re a grunt in investment banking early on and investment banking career. Although at the end, when you’re a partner, investment banking is actually a really cool job. But just the grunt part was what I didn’t like. But being an analyst, the actual role of an equity analyst I thought was really cool. But housing I really fell in love with. I’m someone who really loves design and going to visit model homes and getting to know the industry, it was just something that fascinated me. And one of the things that really drove my, I think success early on was digging in the channel, finding ways to learn about the business but not being dependent on publicly traded companies to teach me or to guide me. And fortunately, as you guys know, the real estate industry is so fragmented. So most analysts at Salomon Brothers, when you start out, they gave you a year. Go learn your industry, and do whatever you need to do to get yourself ready to launch to the investment community. And they gave you a little guidance, go meet with public companies, go meet with trade associations. And so that began my due diligence and I did just that. I met with a lot of trade associations, one of which was at the joint center of Harvard University that has a housing studies.

Ivy Zelman – It’s called Joint Center for Housing at Harvard. And Jim Brown at the time was like introducing me, I’ll introduce you to a private home builder. So it sort of began through that initial interaction, that coupled with a Salomon Brothers salesperson who was assigned to me as my official buddy, that was teaching me and helping me during my year said you really need to dig in the channel and talk to private companies, talk to suppliers, talk to their competitors. So I began picking up the phone and calling private builders. And that was really an opportunity to learn from those people as well as differentiate my views. And eventually after two years as a equity analyst at Salomon Brothers, I was sort of already being recognized for the work that I was doing. And I was there for about eight years in total and was ranked, but then unfortunately Smith Barney acquired Salomon Brothers, now City and I was out of a job even though I was a ranked analyst. So I actually was back in the job market. And Credit Suisse hired me. So I went to Credit Suisse and was there for a decade. And during that decade I continued with the methodology of finding industry executives at the C-suite level that are in private entities to actually utilize their information to aggregate and better understand what the public companies would be reporting. So that was sort of the process. And eventually in 2007, I had a very strong reputation, I was in the eye of the storm and I’m happy to go in more detail if you’d like about that.

Ivy Zelman – But what I realized is I had this unbelievable network that I felt like the firm at Credit Suisse was benefiting from broadly across all aspects of Credit Suisse’s business, but I was only being recognized within the home building space and in terms of being monetizing this network. And so I decided along with my business partner, co-founder, Dennis McGill and that we would go on our own and monetize this unbelievable network and differentiated work that we do. And that’s how really we kicked off Zelman in 2007. And we brought along Aaron Latner who was our associate at the time and my secretary, Melinda Greenwich and my husband joined. And that was the five of us and we just started Zelman and that was really the history of what was really the catalyst to get us as a start-up.

Adam Hooper – And like you said, going from being ranked and not necessarily being recognized for that work to now I think you’ve been ranked first 11 times by institutional investors. So that’s a pretty good, pretty good kind of rise there and now obviously you’re back in ’05 and then in ’12 calling both the peak and the trough of the housing cycle. What are you doing differently than others, right? Is it this network that you’ve mentioned of private data that you’re getting to look at the public markets through that lens of data that others might not have access to, what is, without giving away the secret sauce, but how are you able to do things so differently to make some of these pretty contrarian calls that have actually turned out to be quite accurate?

Ivy Zelman – Well, thank you first, we’re really proud of what we do but I think, as you think about Zelman and its platform, really what to start to think about what we do, and our secret sauce really is about our talent. So we’ve got analysts that are part of Zelman, that have been with us 15 years, 10 years and these are tenured analysts that are working in a respective part of the housing mosaic. We think of it as a puzzle. And whether you’re looking at the home builders or the multifamily REITs, or the mortgage industry, the building product industry, what we do differently is we collaborate and triangulate all of the analysis to provide a view of what’s happening from all aspects of what we think of as the housing ecosystem, housing food chain. And I think one of the things that we recognized early on when we were Credit Suisse is that analysts are generally not working with what would be sort of an adjacent area of coverage even within an area as big as technology, technology analysts aren’t sharing and working together. So today at the bulge bracket there’s tremendous turnover of what’s happening is a juniorization of really young analysts where the older dogs are leaving and the younger coming in. And it’s just tremendous turnover. So we’ve got an unbelievable level of talent at Zelman that’s tenured, and they collaborate and work together. Now, then taking a step further each of them are responsible for their respective silo and they have proprietary surveys that we’ve build from picking up the phone and calling and chatting with a private builder

Ivy Zelman – and learning to automated very very significant sample sizes in each of these areas that we call our housing mosaic. And then we’re aggregating and we’re triangulating the information and that’s really what, we’ve got close to 1,000 industry C-suite executives that are participating in our network. And my husband always jokes that I like meeting new industry executives more than I do like getting jewelry, and I can promise you that’s not true but he likes to say that. But we’re always looking for new industry executives ’cause frankly one of the reasons I love the business is because we’re learning every day and we’re never complacent about whatever our view is. But that’s really what we think is the secret sauce.

Adam Hooper – So there’s two things I want to kind of dig in there. First is this turnover and kind of generational shift which we’re seeing in the real estate space as well, certainly with technology. We’re doing a prop tech series with Goodwin and we talked about that specific thing of, as the kind of current guard of leaders in the real estate space get replaced with younger, more kind of technology centric executives coming into those leadership positions, that’s having a pretty big impact on our space. Do you see something similar happening in the equities world and the analyst side of does this younger generation kind of bring with them a different look on things? And then as a follow-on to that, how much of what you guys do is science versus art? And do you see that shifting with this generational trend as well?

Ivy Zelman – So to answer the first part of the question, I’d say yes. We are seeing definitely more quant tech analysis that is using AI. And I think frankly one of the, I think misnomers about analysis is that it is a science. We think it’s much more of an art, although we do use ourselves a lot of, we’re aggregating data and we’re scraping websites and we’re using a lot more automation than we ever had before. But just take credit cards for example. You could buy credit card data and people are spending significant amount of their budget on various data that they can acquire. But it tells you real time what’s going on in that month, but it really doesn’t direct you to sort of longer term what the trends are going to do going into the future. It gives you a real-time analysis but it doesn’t really direct you beyond sort of that current timeframe. And what we really find is that you need to have both, you need to have the quant side but you also need to have the human side of it where you can actually be on the phone with a C-suite executive you read something in their survey they filled out that you didn’t really quite understand. Or they told you something that was really somewhat disconcerting or something that was really interesting. And then you’re calling and you’re talking to them about it and sort of shaping what we think is going to happen in the future is also based on significant demographic work we do. Whether we’re talking about Millennials and lifestyles, or what the Boomers are doing. And so there’s really more an art

Ivy Zelman – that we think is involved in analysis, especially in the real estate market, maybe everywhere than what today’s bulge bracket large even the two boutiques are willing to replace human for AI. And we think that will have that advantage ’cause we’ll always have the human aspect. And lastly I would just say that people always ask me, well, how did you guys call the top? And I think one of the things we remember with so much dependence on economic models, and so much of the analysis that was done was not collaborated and looking at all of the mosaic. So I think we can see some risk that if the AI world continues to evolve and people try to replace the human, this sort of thought process and the thinking aspect of things that come with fortunately humans, I think they’ll be at a disadvantage and will continue to use both.

Adam Hooper – Yeah, I think that makes a ton of sense. And you can, I forget the exact quote but basically you can abuse the data to tell you any story you want, right? So you can find that story if you just look at the data without that human component, that can tell you one story but making sure you have the context like you said to kind of ask that next layer of questions of why and in what is that story that’s being told by the data rather than just trying to seek those signals. I think the addition of machines to humans, seems like that will be much more powerful than the replacement of humans by machines. So we’ll see how that plays out in the future. So in terms of just kind of overall kind of current market conditions, what are some indicators that you are paying attention to or for listeners of the show that are interested in investing in real estate, again primarily multi-family, through platform like ours, what are some of those factors that you guys are watching or kind of early indicators that you are keeping an eye on that might be signaling what’s to come?

Ivy Zelman – Well, I hate to sound repetitive but it just goes back to the survey work we do. Our surveys which are done monthly that were aggregating in each area with inclusive multifamily home building, etc. Mortgage, building products, whatever we’re aggregating that month we’re doing it very extensive across all aspects of that silo. So every piece of every silo we’re analyzing through this survey aggregation process. And it’s what everybody looks at. But what makes it different for what we do is that we are trying to assess with the metrics that are available in the public markets, whether or not they align with the survey results that we’re seeing and whether or not we’re learning and we’re seeing anything different. So Happy elaborated area but I think that it’s really the surveys and I think that that provides us to make ahead of the curve calls. So today if you’re looking at home building and you’re wondering what’s going on, I think what we learned through a survey conversation, whether it’s a live call that we follow-up or which do live calls as well as the automated hundreds of builders that are filling out the survey, we might see something that really gives us pause through a demographic, let’s say thematic work that we’ve done on lifestyles that Millennials want to own. And everyone’s saying well no, they don’t, they want to walk to work and there’s going to be a secular decline and very prominent people in the marketplace are saying homeownership is under secular decline and we’re going to see homeownership rates decline to 50%. And we’re like no, no we’re not.

Ivy Zelman – In fact we think it’s lifestyle that drives the decision to own and/or be in a single-family shelter, and therefore you know we come out with a report about the rebound in entry-level that we think drive to qualify and the exurbs is going to come back in vogue and everybody is in denial about that. That is even something that could come to fruition because they’re so negative. So what we find is that we learn enough that we can come up with themes, because we’re thinking and we’re talking and we’re learning. So the thematic work that we do really is really based upon the survey interaction and where we learn from our executives, the direction of the market. So let me stop there, I know that you’re looking for maybe more specifics like inventory occupancy, things like that but I’m happy to just continue to reiterate that there’s really nowhere in the marketplace that can duplicate what we do. And the survey work really gives us the leading edge and we’re looking what everybody else is looking at but from a way different lens.

Tyler Stewart – So when you do a survey and then you’re looking at the equities market and demographic lifestyle changes, are you using the equities market and your knowledge of the lifestyle to confirm what the survey is showing you? Or how do you use these three different pieces to come up with your theory on the market?

Ivy Zelman – So if you think about the thematic work we do and if we talk about demographics, and if we think about Millennials and different age cohorts, income growth, job growth rates, migration trends, utilizing the thematic work that we may do where we did a piece back in 2011 called leasing the American Dream. Because back in 2011, the idea of ownership was never going to come back to fruition and everyone was going to rent. We develop and cement our thesis. And our thesis which is more long-term, and it may just be in that particular example where we were saying that people are going to be renting single-family homes because they’re being displaced because of foreclosure. And thinking about what the implications are to the market because of this phenomena, we then do a survey on single family rental and we build it from scratch. And we find operators, developers, owners, property managers that would participate. And we might not even publish a survey for a year because we’re building it. And building it is through networking. Well, are you in single family rental? Finding people through trade journals and finding people that are in our business, building a significant sample. And then every month once the sample is at significant, statistically significant level where we’re getting our squareds to the public company’s results and call it over 95%, we can then take what we learn in our surveys and then test if our thesis is still within the guardrails. And if we’re off track then we need to maybe reevaluate sort of our longer-term view.

Ivy Zelman – And maybe the single family rental story is a bad example because there weren’t public companies back in 2011 that we could sort of look to the equity markets to sort of ascertain whether or not, were accurate through what we were learning monthly but take the core sort of flagship part of our mosaic which is the homebuilders where we’re surveying 15% of new home sales. The public companies today are 40% of new home sales. When I started my career they were 8%, so they seen massive growth and market share. But when we do our home building survey, we’re aggregating that, we look at the results and we have a theme that we for example in 2015, I remember standing at a stage at a conference and mostly industry executives in the audience said hey you guys, if you build it, they will come because they were reluctant to build a true affordable product. So we had a real deep dive analysis that we published on entry-level, the rebound in entry-level affordable housing. And every month in our survey, as well as some other research we’ve written about it, we needed to continue to see that it was happening and then we needed to see if the public companies were willing to come to the dance floor and actually try, and be willing to strategically invest capital. And now, the reason I mention the dance floor is the joke is you’re the prettiest girl at the dance floor now if you’re building entry level as compared to back in 2015 where only one or two builders like DR Horton and LGI were willing to even go into this drive

Ivy Zelman – to qualify further out exsurb. So it’s really about taking the survey and then looking at what the public companies report and seeing that the work that we’re doing is actually the true correlations of 95 to 98% are in fact giving us the ability to make those accurate calls on the companies. And for modeling and all aspects of what we publish for forecasts.

Adam Hooper – And now, I want to kind of riff off of what you said there and kind of compare and contrast a little bit between single-family space and multi-family space. Again most of what we see on platforms like ours is multi-family investment opportunities, where you’re building affordable multifamily just isn’t a thing, right? You can build a house at the entry level but we don’t see a lot if any new construction for kind of entry level or workforce housing in the multifamily space. How do you see those dynamics play out or how do you look at those contrasting dynamics between the ability if a builder chooses to build entry-level single-family product versus what we’re seeing on more of kind of the workforce entry-level multi-family rental product?

Ivy Zelman – Let me see if I can answer it, if I’m getting at what you’d like. So in the multifamily segment of the market, first we look at shelter to shelter. So we really don’t necessarily differentiate shelter just by thinking about them in the category way that you describe. But obviously there are different companies that operated and most of them only operated one versus the other. But within the multifamily right now, there’s a wall of capital that’s chasing value-add, and there are operators and developers that are looking to do work for US housing. I think it’s a maybe growing trend that’s coming from a little base, but the value add product is the hottest product right now of any type of multifamily asset class. And where suburban class A where we think the supply is at multidecade highs or the backlog we should say or multi decade highs, I think there should be a shift by these developers and/or rehabbers should go out and bring more affordable product. But there’s not necessarily the perception that they’re not going to be able to lease up all the supply that they’re still bringing at that higher price point. Within the single-family market, the builders today are still way below where they would normally be for what’s a true affordable price point. So they still have a nice long runway and are accelerating their capital into that affordable price point. So I think they’re going to take share but they’re going to take share from a renter who today is frustrated because they’re in an apartment and they’re getting rent increases

Ivy Zelman – and they frankly are growing out of the apartment because they might have had one or two children and it’s time for them to pursue the American dream. And if they can’t afford it, maybe they’ll rent it but I think that what they’ll find if they don’t provide the alternative affordable rental multi-family product, they’re basically just pushing their tenants to the single-family market whether it’s single-family of rent or single family to own which is going to grow in the absolute number of affordable choices in the marketplace.

Adam Hooper – And so do you look at, so you treat a shelter as shelter, do you differentiate between single family rental versus for sale, and if so how have you seen the trend for the single family rental REITs or builders that may be holding inventory and renting it out, or just individual investors acquiring large portfolio as a single family and getting those into the rental market versus the for sale market. How has that affected your analysis or has it?

Ivy Zelman – Well, to answer the first question, we do look at it, this as shelter, so we don’t differentiate between owned versus rent from thinking about a lifestyle and where you are in various milestones. So an interesting stat from our perspective is that by the time you’re married with two children based on ages 25 to 39 I believe, in that cohort, 82% will be living in a single-family home, married, two children. And that would compare to 25 to 39 where 38% that are single are living in a single-family home. So whether you go from single to roommate to marry, to one child, to two child, the upward trajectory in choosing single family whether owning or renting is pretty significant. And then I look at that and I say wow, because we know that there’s roughly 75 million Millennials and right now the oldest are in the mid-30s. So this major tailwind that we have is actually, it’s going to be a significant benefit to the shelter single family but guess what? Based on the work that we’ve done on, on just understanding the supply, we’re at a substantial deficit of single-family shelter. In fact we believe for a single family, we’re building about 25% below what we need just based on incremental households plus demolition. So when you think about the future between now and let’s say 2030, we are going to have a severe shortage unless we put the accelerator, our foot on the accelerator and build a lot more affordable single family or for rent. So that’s interesting whereas the demographics for the multifamily market are actually the opposite.

Ivy Zelman – We’re actually going to see the number of, call it 20 or 18 to 24 year-olds are actually going to be, by 2030 are going to be going, will be negative year over year declines. So what we think about when we look at single family is that the shelter itself is a severe deficit and builders today, they’re somewhat resident to not build and build for rent and hold it in their portfolios. Some of them are willing to sell the last phase, let’s say of a community to the single family REITs or to single family operators. Some builders are reluctant to do that because it might create a negative stigma in the community. But there’s no question, there is a significant upward trajectory trend in build to rent. And I think that’s going to continue. And if I was thinking about where I’d be putting capital myself, I think that would be a very significant opportunity as it’s really just beginning and even home builders you mentioned it. Some of them do retain some of these single-family homes and rent them out and try to have a counter-cyclical cash flow stream because that is an opportunity they think that will enable them in a downturn to thrive. So it’s starting but it should continue to accelerate.

Adam Hooper – So it sounds like you’re still, at this point you’re fairly bullish on single-family as a asset class.

Ivy Zelman – Absolutely, as an asset class, certainly I think demand will continue to be a very strong tailwind with the economic backdrop we have today assumingly that was to change where today you’ve got almost Nirvana with respect to strong employment, wage growth, high confidence, the deficit as I spoke about. I think that lifestyle when people start having children, you remember the State Farm commercial where the guys are drinking beer and hanging out with their buddies and they’re never going to go to the suburbs. And then next thing you know they’re getting married and next thing you see a picture or the TV commercial shows them in their driveway washing their minivan and they’re out in the suburbs after they’ve had their second to first kid. So I think as our Millennials age, they’re going to look for the American Dream and they’re really not going to, they’re not going to act any differently than prior generations. Now, the one variable that might be a risk assuming again a somewhat status economic backdrop that we’re in today is price because affordability does come into question. Whether you’re going to have to rent that home or whether you’re going to own that home and that’s a separate discussion. But the demand for volume, we are very very bullish on.

Adam Hooper – And now there’s a general, I guess concern amongst investors and folks out there. We’re quite deep into this recovery. There’s starting to be some, I guess we’ll call them interesting loan products out there for buyers. Not quite reminiscent of what we saw in the ’05, ’06 era but there’s concerns out there, right? Are we reaching kind of a toppy part of the cycle again? What have you guys seen in terms of the debt landscape obviously having been through that and lived that firsthand in the last cycle and making those calls. Are there any factors out there that are concerning to you or kind of warning signs or anything that you’re seeing on the horizon that’s starting to look a little bit suspicious?

Ivy Zelman – So as it relates to mortgage availability, we survey about, somewhere let’s just say a little bit south of 20% of total mortgage originators in the country, so it’s a very robust survey that we do. And we ask them on a scale of 0 to 100, 100 you can’t get a mortgage, zero you can and get a mortgage which was what it was in ’05 let’s say. And 50 it would be normal. And back in 2012 that index was call it 80, so it was a very stringent period. And since 2012, we’ve actually seen that decline to just a little bit over 50. So from an underwriting stringency perspective, it’s pretty normal. Now within that, what you’re asking is there any exotic mortgage products or anything that’s disconcerting? Let me just say that about 75% of all mortgages in the country they’re originated are being either backed and insured by FHA VA or Fannie and Freddie implicitly guaranteeing the mortgages. And so there are guardrails that we just think about as a credit box defined by the government. And you have to stay within these basic guidelines in order to sell the loans or insure the loans to these entities. And the one thing that got concerning was that FHA was actually allowing within their credit guidelines, loans where there was way too much in our opinion, leverage where consumers that had a low FICO score, let’s say 580 and FHA only requires that you put three and a half percent down. You can actually get an FHA loan with 10% down if you have a 500 FICO score. But they’ve guidelines at 43% which was a sort of arbitrary number that was used

Ivy Zelman – in Dodd-Frank’s legislation in 2014 that said if you go above a 43% debt to income backend ratio which just means what’s your debt service relative to your income then you could be sued basically simplistically. So lenders don’t go above 43 but FHA is exempt from that. And Fannie and Freddie have a patch that will expire in 2021 that’s now a concern. But for the majority of the loans that FHA are doing, about a quarter of them are above 50% debt to income ratios. That in itself might not be disconcerning but they’re only putting three and half percent down and a portion of them, a negligible portion of them really were at that very low let’s say below 625 FICO. So long story short, they tightened. They tightened this year and we believe it’s a prudent move and they’re not allowing above 50s, and they’re going back to manual underwriting. So there’s some of that that’s going to enable I think the overall risk in the market to be diminished. But with that said, that’s really the only thing that we see in the market that was concerning to us. And another aspect of mortgage availability is some down payment non-profit government programs that are maybe also at risk of being eliminated and/or tightened that’s out there.

Adam Hooper – Perfect, and now before we move into more multifamily conversation, let’s kind of wrap up the housing market discussion or single-family market with iBuyers. How Opendoor kind of being the pioneer there, Zillow’s into it, I think Redfin’s into it. There’s a bunch out there that are trying to shake up the traditional sales process for single-family product. How is that impacting your analysis? Is that something you guys are paying attention to, or is that just kind of another buyer in your eyes for this product?

Ivy Zelman – No, we’re paying significant attention to it. I think it’s really phenomenal opportunity for consumers that are in the, let’s call it the meat of the market. Today call it close to something like 75% of homes are below 500,000 in the country that are listed for sale or even higher, call it 80%. And so what these companies like Opendoor have done and there’s like you mentioned several, they have algorithms where they will offer the consumer cash within a few days based on the algorithms, the price that they determine and it allows the consumer to have liquidity. And that consumer may be below the retail price of what they’d otherwise get if they went the traditional route. But let’s say it’s somewhere between five to 8% discount to retail but let’s say that person needs to move, it provides liquidity. And so it’s really growing at a pretty fast trajectory and we expect more capital to enter the market. I think that who will be the winner, and what the impact and disruption, the impact will be on the real estate broker is fascinating and we are analyzing the brokerage industry very closely. We follow Zillow, Redfin, Religi, Remax and right now the investment community would characterize a traditional broker as under attack and being disrupted. So the iBuyer is part of that and it’s a very important part of what we analyze.

Adam Hooper – In a downturn, how are the iBuyers protected if they’re holding a fairly significant amount of inventory? Is this pricing that they’re able to offer at? They bake in some downward protection but if we were to see a market turn, how do the iBuyers perform in those scenarios?

Ivy Zelman – Well, I think that’s the $20 million question because we get to see a downturn to prove out how it actually, how they perform. And when you think about, what I think the iBuyer ultimately would like to have is the ability to have securitization market where they take those homes and basically off balance sheet. That’s not really the case as of yet. There’s some deals may be getting done, I think Opendoor is probably the leader there that’s doing more and not basically doing the type of LTVs that some of the open, I’m sorry, the other iBuyer companies are where they’re taking a significant amount of risk and they’re only putting down let’s say, LTVs that are 93% or something. So I’m dubious frankly and I would be concerned. We have a sell rating on Zillow because we believe that they are not only due to the fact that they are in the iBuyer market. But when you trade at 40 times EBITDA, and you’re viewed to be a technology company and now all of a sudden you’re a real estate professional flipper and you’re cannibalizing the revenue that you’re generating from the brokers that are spending money on advertising which is 70% of their revenue, it’s a pretty tough transition that they’re trying to successfully orchestrate and execute. So it’s going to be interesting but I would be dubious that this could be a more cyclical business. But I think some of the smarter guys like Opendoor will probably not even go public until they actually prove what they’ve been able to do through the downturn, or a eventual downturn.

Adam Hooper – Are you seeing more activity, again, you kind of real estate and real estate tech. You just mentioned with, if and when Opendoor would go to public. How are you seeing that public market activity now? Are you seeing many interesting companies that are historically in the private side ’cause obviously you survey a lot of folks in the private sector. Are you seeing much interest in getting in to the public equity markets right now? Or is that trend of kind of staying private as long as possible, are you seeing that continue?

Ivy Zelman – Well, Zillow and Redfin are public so they’re doing it while being public companies. And the other is whether we’re talking about Offerpad, Knock and some of the other entrants, whether they’ll choose to go to the equity markets. I’m not sure what their strategies will be. We do see other private companies, Compass is, a very significant player in the real estate brokerage industry that is today private with some very significant seed investors that allow for them to continue to grow with let’s say, not the visibility of public companies and scorecard that everyone else has to adhere to. And today they may go public in the future but they’re a big disrupter, and the perspective that the industry has is eventually they will go public. So there are companies in the marketplace that believe they have the ability to be extremely successful in a sort of dinosaur industry with a different way to go about the marketplace. Compass is one that people are waiting their public offering.

Adam Hooper – Okay, and now it’s switching a little gear into the multifamily space. You mentioned the, we talk a lot about Millennials in this space right now. On our side this wealth transfer from baby boomers to Millennials, just that demographic shift is, we’re in the midst of that. Your comment about how the earlier and I guess the Millennials are reaching that stage where they’re going to be transitioning into single family. 75 million over the next, I don’t know how big the generation is, 20 years plus or minus. That’s going to have a pretty big impact on the multifamily space. So in addition to that, or maybe digging a little bit more on that, what are some of the themes or stories that you’re seeing in the multifamily world right now as it relates to those demographic trends?

Ivy Zelman – Well, I think it’s fascinating. We’re relatively newer to multifamily, only been doing it for 12 years as opposed to 30 years analyzing the overall housing market. And what I’d say, that first it’s a phenomenal business. My only mistake was not actually getting into multifamily myself and creating this great annuity stream. So it’s a fantastic business compared to the for sale business which not only capital intensive but you have to rebuild your factory every time you sell it so it’s a tough business. But multifamily is a fantastic business but what we have is an amazing amount of capital that’s chasing this asset class called the wall of capital. And when we were back in 2004 and ’05 and we were, and 2006, we were really concerned about what was going on in the marketplace. Now people look back and it was like, it was so obvious, right? They were like well, how come people didn’t see it? I’m not suggesting that multifamily is on, at this point is going to have something anywhere close to some type of downturn like we did in the for sale market. But what we see is this significant supply, a tremendous amount of urban class A supply. In fact I mentioned earlier, if you look at what’s in backlog accorind to the Census Bureau which is defined as anything that’s basically broken ground. So close the permit actually started and is in process, we’re at 600,000 units. And a lot of that is being delayed because of factors from the level of labor constraints, that we have to restocking the capital stack due to re-underwriting. You’ve got just weather delays,

Ivy Zelman – there’s a numerous number of things that are, inspectors not showing up and doing the utility inspections and getting the building completed. But nevertheless, what happens if the economy weakens? What happens if we start to see unemployment rise and we have all of this supply? So our premise is right now that these units would get leased up. The question is at what rent rate? And then the question is also what happens if we start to see some of the rent regulation changes that are being contemplated? And it’s almost like everything is perfect right now and couldn’t be better and there’s no room for error. And so I worry a bit about the multifamily market. The valuations are extremely rich. We’re at record low cap rates and there’s just a tremendous amount of capital still coming to the market looking to get to the kind of returns that the only way you can get to is by assuming inflation. And right now we’re just, even in this perfect backdrop of an economic environment, the urban class A is lucky to get 2% rent growth. So what happens if the dynamics of the market from an economic standpoint change?

Adam Hooper – That’s why we’re asking you.

Ivy Zelman – I would say that you wouldn’t get your return that you underwrote.

Adam Hooper – And I think that’s kind of what we mentioned earlier, right? The different sectors, right? You’ve got this urban class A, almost the entirety of a new product delivered is that, right? It has to be class A because you’ve got land prices, you’ve got construction prices that have just risen at astronomical rates. The only way that you can make a project pencil for new development is in an urban class A where you’re getting top of market luxury rents. And we haven’t seen a lot of new construction just due to this pure economics of it in that affordable place. So you as you said before, a lot of capital chasing the value adds. So maybe looking at, if we do have again some kind of economic pullback and some of these luxury class A rents start dropping down to where there may be bumping up against some of these class B rents, will that pressure the market all the way down through the class cycles or will that be somewhat isolated to class A or do you see much movement in the more kind of workforce class B, C units depending on what happens in the class A maybe, I don’t know if that’s something you track or kind of your thoughts on that, yeah.

Ivy Zelman – No, we absolutely do through the survey network. And just to give you some perspective, our apartment survey is probably one of our largest. We have more than one and a half million units and growing that we’re aggregating so the reads are only, call it a third of that, the publicly traded read. We’re significant sample size enabling us to really dig down as deep as understanding the trends within asset classes within local markets. And so when you look at the class A being as robust as it is and a lot of that as you said, due to the development costs and construction cost, land cost. Assuming that you see pressure on class A rent growth, I think it does trickle down. I remember in Dallas when supply was impacting class A, we had B operators that were getting more frustrated because they were starting to see pressure because the A’s were coming down to get leased up. And it was putting pressure on their business. So I do think it trickles down. One offset to all of this is what’s been happening, that I think is a long way from actually making any significant headway in terms of positive impact is sort of the technology related to factory built multifamily and construction. That’s something that’s being worked on and some companies that are at the leading edge of that, like Guitarra may in fact enable more urban multifamily construction at lower price points. You hear about co-living platforms which is pretty interesting. I’ve been fascinated by the success that co-livings had in Europe. But we need to provide more affordable housing in the multifamily market.

Ivy Zelman – The question is, who’s going to do it under what type of capital return requirements will allow for that to come to fruition?

Adam Hooper – So yeah, I think that is interesting. And the ability to deliver new affordable units, right? Is that going to come from taking a class C unit and improving that again in the value add space, or do you think that some of these kind of prefab or modular design and kind of efficiencies in the construction process, do you think that will have an impact and an ability to really turn around what a new affordable product might look like?

Ivy Zelman – It’s possible, it’s early stages and we’ve yet to really see anything of significance come to fruition. But I think that’s where capital today is being deployed by smart people that are attempting to do just that, and it’s yet to be determined whether they could be successful. You also hear about microhousing and it’s something that’s on the rise by some smart developers that are looking to provide again another way to provide affordable housing. So we’ll continue to monitor and learn and that’s the beauty of what we do. We’ll be the first to know what’s going on.

Adam Hooper – Perfect, and obviously it’s hard to paint the nation with one big brush. So are there any hotspots or kind of bright stories that you’re seeing in terms of where some of these fundamentals are maybe looking a little bit better or some markets where these fundamentals are looking a little bit worse in terms of affordability, job growth demographics?

Ivy Zelman – So is your question for for sale or for rent, which which market are you focused on?

Adam Hooper – Let’s do those for rent, again the multi, or I guess yeah, we’ll stick with for rent product for now.

Ivy Zelman – Okay, well it also is a question of where is job growth the strongest. I think jobs are the most important underlying metric that we have to understand. And the dynamics really drive the ability for the multifamily market to see the type of lease ups that they need are getting to the rent growth that they assumed. And those are somewhat different questions because I look at some of the cities right now like Orlando, Nashville, Austin which are very strong in terms of overall job growth and fundamentals for multifamily. I was just in Nashville speaking at a real estate conference and I was just, unbelievable booming market and actually got to sit in on a presentation and it’s everything you’d hope for if you were in a city where pro-business, giving young people want to live there and tremendous supply is coming to that market. So the question then is are they going to oversupply the market? But right now, Nashville looks extremely strong and you know you go into a market like Franklin, there’s a lot of cranes and there’s a lot of supply coming. Will that supply actually get to the type of returns that new development is underwriting is a different question. But whereas other markets where it’s a little bit tepid, DC, we see the markets throughout California, some of Oregon. Rent-controlled New York is on the table in many cities. In Oregon we actually had vacancy, de-regulation of vacant units and rent plus CPI caps that came to fruition. So there’s some headwinds out there for some cities but it’s also a question of how much supply is coming

Ivy Zelman – and where incrementally job growth is in those markets. So it’s hard to give you the I think specific answer you want but the winners and the losers, everybody’s a winner right now multifamily because it’s all doing well. The order of magnitude is different and where you see the strongest markets would be in those markets where supply is not coming at this unbelievable multi-decade high that’s going to impact competitively, plus you don’t have as strong a job market and/or you have rent control pending or even possibly already legislated. Those are things that will differentiate the local markets performance.

Adam Hooper – Great, so for listeners out there that are looking at investing in this either in single family units or in multifamily units or a platform like ours, maybe just to kind of start wrapping up, how can they get more information about the research that you were doing or how can they learn from the research that you’re doing in terms of other will be publicly available data sources or indicators to watch as we again mature through this cycle and maybe start to see some of those indicators.

Ivy Zelman – Well, first they should be a client of Zelman’s. That’s how they would do well. We would encourage them to go to our website at zelmanassociates.com. Kim Gray, you can reach her at kim@zelmanassociates.com. Really will help and guide with any inquiries. We did create a newsletter that’s a high level sort of on the entire mosaic called the Z Report that you can trial for 60 days before purchasing. But I think today, really the work that we do, the survey work that we do, all of that is going to continue to allow us to provide the best insights of what’s going on in the marketplaces. So I think that the most important thing for anyone interested in learning more about what Zelman offers is to contact again, kim@zelmanassociates.com. Go check out our website, look at our newsletter. You can sign up for the Z Report. We also have a housing newsletter which is at no cost she can sign up for. And we provide a significant amount of insight on what’s happening not only today what our long-term perspective is, we have macro forecasts. Unfortunately today, we don’t have an unbundled sort of Amazon go put it in your cart product. We will probably in the next six months so you’ll be able to buy a product that you want or just buy multifamily or just buy home building. But we are in the midst of, basically the technology is not ready yet but will be. But we would encourage you to inquire and contact us directly if you’re interested and again just sign up to the Z Report.

Adam Hooper – Perfect, and we’ll have links to all that in the show notes for listeners out there. So we’ll be able to make sure they get in touch with you. Anything that we didn’t discuss that you wanted to add or anything that we should be thinking about that we didn’t go over today?

Ivy Zelman – No, you’re extremely thorough, I think you got it all. I think one thing I would just love to highlight because you didn’t mention. Home improvement is a big part of what Zelman analyzes, and we also analyze non-residential besides commercial multifamily at a high level but in the building product area, we’re aggregating more than $100 billion of manufacturers, distributor, retail revenue. And that breaks down, whether it’s a cabinet manufacturer, a flooring manufacturer, subcategories of flooring, plumbing, paint, roofing installation and it’s probably one of the most extensive thorough reports that no one on the street can duplicate. So important to know that we’re very bullish on home improvement. We have a unbelievable aging housing stock and we had a lot of people that unfortunately call it a 45-year-old stock and much older. The Eastern Shore Board or east of the Mississippi then west of the Mississippi, but it needs significant renovation and people just haven’t invested. And so we have Millennials that want new homes and we have a lot of dated homes. And we need new homes because that’s what Millennials want as well. So the home improvement part of our firm’s analysis is a big part that we didn’t get to talk about.

Adam Hooper – Well, I would imagine there’s some pretty interesting indicators there of the supply side for these home builders, right? Whether it’s retail and people that are renovating or rehabbing at the consumer level versus the building supplies that you mentioned. That’s going to be a really interesting data source as a predictor for overall health, right?

Ivy Zelman – Oh, absolutely and I have a very extensive marketing deck that I go in my little Ivy dog-and-pony, go out visit my institution clients or industry executives. And the one of the, they all say to me, just show me your three best slides or what’s the most important slide because you’ve got too many. And the top three, the number one slide that we look at is the fact that inventories in the United States, listed for sale inventory as a percent of households going back 30 years is at a record low right now. And yet a lot of those homes that are listed, that are at the higher price points are listed and aren’t moving. We call it actually a tailor to market, so we really need to understand what is the aging population mean for housing? What are the boomers doing? What’s happening with this existing stock? Is it being refurbished? One other thing to mention I think is really interesting, we look a lot at birth rate data. And the US population, there’s a lot of concern that we as a country are going to experience , basically the same lack of growth that Japan has had because our population is declining the last five years. And what we point to which we think is bullish, that it’s not reflected in the headline data is that actually the reason why the national population rates are declining is because we actually have teenage growth births since 2007 which are down over 50%. So we actually look at something called good births which are 25-year-old plus birth rates. And with the exception of 2017, which is the latest data,

Ivy Zelman – we’ve had five strong years of 25 plus year old women having babies and that’s really important for implications for what the eventual impact will be to housing. But I’m fascinated by that as well as the fact that life expectancy. I just had the opportunity to chat with a very well renowned doctor here in Cleveland, Ohio who runs Cleveland’s Wellness Center, Dr. Michael Rosen who told me by 2030 there’s a 90% probability that people will live to 110. And my question is what does that mean for housing?

Adam Hooper – Yeah, exactly.

Ivy Zelman – What’s the implication? So there’s a lot that we can go on and on about but we’re always digging and appreciate this opportunity to share with your listeners what we’re working on and how we go about our process.

Adam Hooper – I think what I heard there is we need to have you back to go over those three slides. So my final question, who comes up with the title through for your reports and what’s your favorite title throughout the years?

Ivy Zelman – We all do, I think that a lot of the analysts are creative for within their each areas, they brainstorm. But, all right, so let me think. I loved Investors Gone Wild which was 2005, and that was very timely, during the the crazy days of the boom. We did Wonderland which was in 2006, a report that we talked about builders are going to have to take impairments write-off equity. I mentioned Leasing The American Dream already which was a good one. Oh, Turning The Lights On which is analysis we did on electricity data to understand household growths. Turning The Lights on Household Growth. Let me think there was another one I was going to give you and I’m having a brain freeze right now, but it’s the team, it’s everybody. We’re always putting our heads together and trying to think of fun things to come up with.

Adam Hooper – Perfect, well Ivy, thank you so much for joining us today. It’s been a pleasure to have you on and a lot of good info on here.

Ivy Zelman – Thank you, appreciate it.

Adam Hooper – Great, well listeners as always, if you have any comments or questions, send us a note to podcast@realcrowd.com. And with that, we’ll catch you on the next one.