\n
![](\"https:\/\/fortune.com\/img-assets\/wp-content\/uploads\/2024\/07\/GettyImages-98842857-1-e1722362458205.jpg?w=2048\")
<\/p>\n [ad_1]
\n<\/p>\n
Ivy Zelman was \u201cPoison Ivy<\/a>\u201d long before she called the 2008 housing crash<\/a>. She didn\u2019t like the nickname much in middle school, but things have changed, and the executive vice president of Zelman & Associates now considers it a badge of honor. She was an analyst at Credit Suisse who followed homebuilders in the years before the subprime mortgage crisis<\/a>. Housing was unaffordable, lending was bonkers<\/a>, and builders were buying land and scaling frivolously, she explained. \u201cThere was no money down and liar loans,\u201d Zelman said.\u00a0<\/p>\n \u201cPeople used to joke, \u2018Oh, someday she\u2019ll be right,\u2019\u201d Zelman recalled, and in the summer of 2005, her team released a report called \u201cInvestors Gone Wild.\u201d In the second half of the year, the market started to turn for the worse, and she doubled down. Then during a 2006 earnings call with Bob Toll, then-chief executive of McMansion builder Toll Brothers<\/a>, Toll said things were getting better, and maybe the housing market had bottomed. Zelman famously responded<\/a>: \u201cWhich Kool-Aid are you drinking, because I want some.\u201d<\/p>\n Yet, stocks rallied that year, the housing market was thought to be recovering, but she wasn\u2019t convinced; Zelman kept her bearish tune. \u201cThat was hard,\u201d she said. \u201cThere were many nights where I could tell you that it wasn\u2019t fun.\u201d But she was vindicated months after that call, when mortgage lender New Century, which issued $51.6 billion in subprime loans in 2006<\/a>, filed for chapter 11 bankruptcy<\/a>. \u201cThat was the beginning of the end,\u201d Zelman said. The housing market crashed, and it was a catalyst to the Great Financial Crisis<\/a>.\u00a0<\/p>\n Less than two decades later, and the housing world is in another predicament. Its most dire problem, as Zelman sees it, is a lack of affordability. Lower than ever mortgage rates<\/a> and a pandemic fueled a housing boom; home prices skyrocketed, and eventually, mortgage rates did, too, once the Federal Reserve raised interest rates to tame scorching inflation. Things may be slightly better, but a lot of people can\u2019t buy homes, so they are living with their parents until their mid-to-late twenties, Zelman said, and \u201cit\u2019s delaying household formations.\u201d<\/p>\n It isn\u2019t the same as what happened in the years leading up to the financial crisis, or throughout it, because home prices haven\u2019t fallen, not on a national scale; they actually rose. But sales, or rather existing home sales, have plummeted. \u201cYou\u2019ve never seen recessionary volume with home price inflation as robust as that was,\u201d she said, referring to last year, when existing home sales<\/a> fell to their lowest point in almost three decades. People weren\u2019t selling their homes because they didn\u2019t want to lose the low mortgage rate they\u2019d locked in prior, and there was so little inventory that even if they chose to sell, there was a question of where they\u2019d go. And while she sees existing home sales improving as turnover increases, she doesn\u2019t expect it to go back to typical levels because there\u2019s a demographic headwind too. People are aging, and when Gen Xers and baby boomers age, they move less, Zelman explained.\u00a0<\/p>\n Everything feels frozen in place, and in the existing home camp, it kind of is. But people have to move sometime, and we\u2019re already seeing it in real time. Luckily, because of that, inventory is increasing<\/a>. So in some metropolitan areas where there\u2019s substantial inventory, home prices are declining or are otherwise flat. And it isn\u2019t simply an increase in existing stock as those who delayed moves finally do so, but the presence of new homes. New home sales, until recently, have done surprisingly well, and part of that is because builders can construct smaller homes<\/a> or offer incentives to springboard demand: mortgage rate buydowns are a big one. Still, \u201caffordability is pretty stretched, so the housing market\u2019s kind of in a grind mode,\u201d Zelman said, and we might be stuck in it for a bit.\u00a0<\/p>\n And a Fed cut doesn\u2019t necessarily mean mortgage rates will fall, despite what people tend to suspect, Zelman said, echoing her colleague who said something similar<\/a> earlier in the month. Mortgage rates are correlated to the 10-year treasury yield, but the difference between the two is called the \u201cspread,\u201d and the spread is much higher than historical norms, an indicator of a particularly complex economic environment. The bond market is already anticipating, and pricing in, a rate cut from the Fed, another sign of perceived risk in the mortgage market as well as concerns about credit quality. In the next one to two years, Zelman only sees mortgage rates declining 0.50%. \u201cMortgage rates will still have a six handle on them, and that means that we still have affordability that\u2019s pretty stretched,\u201d she said.\u00a0<\/p>\n And in recent months, home price inflation has slowed<\/a>, and showed signs of slowing further. \u201cWe do expect deceleration to continue and see more pronounced slowing in the back half of the year into the low single digits, and I think that\u2019s really because we view the inventory scenario as likely to continue to put downward pressure on home price,\u201d Zelman said. However, because where new home construction exists varies, there could be metros where home prices don\u2019t ease at all.<\/p>\n<\/div>\n\nA new predicament<\/strong><\/h2>\n
The upside?<\/strong><\/h2>\n
Recommended Newsletter: <\/strong>CEO Daily provides key context for the news leaders need to know from across the world of business. Every weekday morning, more than 125,000 readers trust CEO Daily for insights about\u2013and from inside\u2013the C-suite. Subscribe Now<\/a>.<\/div>\n