Good afternoon and welcome to another Walker webcast. It's my great pleasure to have my friend, my colleague, the exceptional analyst Ivy Zelman join me today. Hi Ivy.
Hi. Love it. How are you? Nice to be here again.
It's great to have you. Since I have you alone today, usually when we have Chris Mickelson and Aaron Appel joining us, I kind of dive right into the questions. And since I have you alone today, I'm going to do a full bio on you because it's been a while since I've done a bio and most people who listen to the Walker webcast know you and know of your background, but I think it is worthwhile to run back through it today as we have a little bit more time of just a one-on-one conversation. So, Ivy, bear with me as I embarrass you a little bit on how extraordinary this background is. So, Ivy Zelman is one of the most influential housing analysts in the United States and is currently executive vice president and co-founder of Zelman, a Walker company. She has spent more than 30 years analyzing housing, home building, mortgage finance, building products, demographics, and the broader residential real estate ecosystem. She began her career at Solomon Brothers in 1990, initially in investment banking before moving into equity research covering housing. She joined Credit Suisse First Boston in 1998, where she became managing director and one of Wall Street's highest-ranked housing analysts. She and her team ultimately earned 11 number-one Institutional Investor All-American research team rankings. What made Ivy famous was her willingness to make big calls against the prevailing consensus. In 2005, she called the top of the US housing market, becoming increasingly bearish even as much of Wall Street remained bullish. Her skepticism culminated in her well-known challenge to then-Toll Brothers CEO during the 2006 earnings call. Then, after the financial crisis, she called the housing market bottom in 2012. Those two calls are central to her reputation as one of the industry's most independent and insightful analysts. In 2007, Ivy co-founded Zelman and Associates with Dennis McGill, building an independent research and investment banking firm focused exclusively on housing and related industries. A distinctive feature of Zelman's approach is combining traditional financial analysis with proprietary surveys and direct intelligence from homebuilders, brokers, lenders, building products companies, and other industry participants. Walker & Dunlop acquired a controlling interest in Zelman in 2021, bringing the firm's housing research and investment banking capabilities into W&D. Ivy earned a BS in accounting from George Mason University. She has repeatedly been named a Barron's 100 Most Influential Women in US Finance, has been inducted into the California Homebuilding Foundation's Hall of Fame — I haven't seen a clip of that one, Ivy — and has taught as an adjunct professor of finance at Case Western Reserve. She is also the author of the 2021 memoir Gimme Shelter: Hard Calls and Soft Skills from a Wall Street Trailblazer, which combines her career story with lessons about leadership, conviction, relationships, and making difficult calls.
So, there's the bio, Ivy. I should dive back into so many component parts of that. But given the research report that you and your team just put out entitled The Decade Divided, I kind of wanted to jump into that as a headline because there's so much right now with where rates are, with where housing is, where inflation is, etc., etc., that I kind of want to roll up our sleeves and dive into some of the data. You and I have spoken in the past about a housing shortage in America. A Decade Divided seems to challenge that narrative. Are we undersupplied in housing?
Well, first, again, thank you. I think my bio needs to be cut down. It's a little long.
I love it. Given you're a member of our team, I love talking about it. Go ahead.
I appreciate it. I'd say that our view is that the housing market is more balanced than what we hear from other trade associations and people that are in the housing ecosystem, and certainly can dig into why we believe it's balanced. And I think that I can elaborate or you can ask me and I'm happy to respond, but we think it's a balanced market.
So if it's balanced, what are others missing? Because we continue — I mean, all you have to do is watch CNBC. Everyone who goes on CNBC other than you now says, you know, we've got a three- to four-million-household shortage in America. And so what are they missing if we're in balance?
Well, I think it has a lot to do with what inputs you're assuming and where we are. So, for example, if we're looking at the future and looking at sort of the inputs that drive the need for more supply, we really focus on household growth. And household growth is a derivative of population growth. They're not 100% correlated, but they move directionally together. And we've been seeing a downward trajectory for both population and household growth for decades. But we're at a pivotal point in our history because we're now seeing — approaching by 2030, we'll have more people that will die in this country than are born. And the only other variable that matters for population growth is immigration, which has pretty much come to a bit of a standstill, as we know, with the current administration. So we look at what does that mean for household growth. Our view is that the current supply is meeting the level of household growth. Some economists are looking at more optimistically overall — I'm sorry, young adults living at home. We think that's a variable that may be more optimistically assumed on a go-forward basis. And the other variable that really makes a difference in any prediction or forecast is going to be vacancy rate. And so again, happy to dig further into there, but those are things we don't get to see how other trade associations derive their narrative of a shortage, but that's what we believe would be the major differences.
So let's double-click on all three of those. Coco, will you pull up the graph here? And to those who are listening to this and not looking at it, this is a pretty dramatic graph that comes from The Decade Divided, which shows US births versus deaths and where we are from a population growth standpoint. Ivy, talk through this slide for a moment as it relates to, you know, what this is showing, because the thing that struck me about it is it's not that long ago that this number was wildly positive, close to 2 million, and now we're down to almost flat.
Yes. Unfortunately, it's not a positive trajectory, as we know, and it's quite troubling. I think it starts with the three components I mentioned: birth rates. Young women today are opting to have children later. Part of that is because they're pursuing higher education. They're also dealing with uncertainties in the economy and affordability concerns, inflation. So many are opting to be one-and-done or not at all. And so the birth rates have been under pressure. A lot of it initially was coming from what was a good thing — young women that were teenagers that were getting pregnant. And that's really a big portion of what helped to put a cap on population growth was that we had young women that were unfortunately having children too young, and that really was arrested. So that's a positive, but overall birth rates are below replacement right now for this country. In fact, we are what I would say much better off than most other developed nations. We're higher in terms of our birth rates, but we're still below replacement, as are the other developed countries. So that's the birth rate story. The other component, immigration. We know with this administration, whether self-deportation, legal immigration becoming more challenging, as well as illegal immigration and deportation, all of that has resulted in less than a half a million people entering this country annually. And we believe that even with a new administration — let's assume the Democrats take the White House — they're not going to open the borders again. And we might see some modest improvement in legal immigration, but we don't think the illegal portion would really change very much. So that was the lever that could really help population. And then we have, respectfully, death rates that — while death rates are actually improving as we have wellness and longevity improvements, the absolute level of deaths has been rising, and annually we will continue to see, call it incrementally, 50,000 incremental vacancies coming from deaths and people aging out. So you add up all three, that results in a pretty steep decline in what would be population growth. Why we called it a decade divided is that the first half of the decade actually had very strong household growth, which is really a function of, we believe, these young adults leaving home at a pretty significant level because there was not only a desire for distance and space, but there was a lot of stimulus dollars and interest rates were very, very low. As we know, as a result of that, there's another chart that we've included that we can look at, but we saw a big reversal of young adults living at home, and that definitely created this pop. In the first half of the decade, we had about 7% household formation, which comparatively — even in the decade 2010 to 2020 was only 8.7% in total — but for this decade, even with the second half flowing to call it 3–4%, we'll be over 11% in terms of household growth. But the minute rates went up in '22, households — or young adults leaving households — reversed and went back to close to levels that were pretty onerous and at peak levels. And we're assuming improved modestly, but not much, and that could be a big variable where other economists are more optimistic about the future and assuming we have young adults leaving home.
So let's jump in on a number of the points you made there. First of all, as it relates to the death rate, you did talk about it accelerating even though we have longevity. Is that acceleration due to the pandemic, and does that then burn off, if you will, as we get those numbers out over time? In other words, did our death rates accelerate because of the pandemic, and therefore in the second half that comes down significantly with the aging population that then mutes that?
Well, the death rate itself, because it's improving, I think it has a lot to do with longevity and people living longer. The impact from COVID absolutely had an impact on deaths that did spike them in the first half — first three years of the decade. But then we've normalized that. But even with that normalizing, death rates are improving. However, again, absolute deaths are still going to rise by 50,000 per annum. We're talking about two-plus million per annum dying or aging out, which will then put what you said was 50,000 housing units sort of back on the market because of that net downturn in population. Incrementally, because of estate sales, you'll start to add 50,000-plus per annum that would result in more vacant units on the market.
So the second thing you said there was that up to 2022, what you pinned it to was interest rates moving precipitously after 2022. Do you think that this is young adults living at home and then moving out to start their own homes — and you said that was moving in a very positive trajectory until '22 when rates started to go up. Do you pin it at all on rates and affordability, or is it more lifestyle? And we did just at that point come out of a pandemic where during the pandemic there was clearly a move for 'I need my own space, I don't want to be around my older parents who might be getting COVID' and all that stuff. Is it an economic issue or is it more a social norm slash societal issue?
I think it's a little of both. I mean, I think that what happened post-'22 is we know that inflation kind of ran rapid. And when you think about young adults living at home, you know, they're presumably trying to save so they can start their own household, whether they're renting an apartment or buying a home with help. I think there's also a part that inflation kept people, unfortunately, unable to generate enough savings to do so even with living at home. But I also think that affordability being extremely stretched had a lot to do with it and still does. But from a secular perspective, it's, you know, nice to live at your parents' house now. They've made it — we've made it so nice for them, they don't want to leave.
I know. I was going to say your three daughters and my three sons might be retreating to our homes these days, even though they're bounding out on their own, but our kids are about the same age. And I was actually thinking about that in reading the report. It was sort of like, yeah, you know, one of the things that's happened as America has gotten wealthier and more people own single-family homes that have an extra bedroom, have two extra bedrooms. It used to be 50 years ago that it was cramped and the moment that you had the opportunity to get out on your own, you jumped out because it wasn't that comfortable living at home. In today's world, A, it's quite comfortable. B, it's obviously affordable. And C, in some instances remote work has allowed younger adults to basically work from wherever, and therefore they're not forced to go rent that apartment in a distant city from where their parents are because they can work remotely over Zoom.
Absolutely. And I think you have to recognize that, you know, we're really following Europe's lead. Europe has multigenerational living, and a lot of that is due to the lack of availability of product coupled with how expensive it is. Even though affordability here is stretched, it's even more stretched in Europe. So we've been seeing more multigenerational living. In fact, homebuilders are offering product that accommodates multigenerational living. That's been a growing part of the housing market. So, not surprised, but I think the negative stigma of living in your parents' basement is gone. When I was 18, I was out. I'm sure you were as well. You couldn't wait to get out. And now, is it because our Gen Z and millennials — are they a little entitled? Are we to blame? I blame myself. Helicopter parents — we want our kids to have what we didn't have. So we make it really nice for them. And I don't think, therefore, it's just about a lack of affordability.
There's — first of all, you know, Europe has plenty of things that we ought to both respect and strive for. There are certain things that we might not want to. I'm not sure that that is a piece of what we ought to go for, but there was a — you may have seen it — there was a great 60 Minutes piece. It's got to be a decade ago now. But a great 60 Minutes piece on how Italian men — the culture in Italy is that single Italian men still live at home until they're 40 and 50 years old. And they did this great piece about the fact that, you know, one after the other, young single Italian men would just hang out with mom and dad. And that was the way that you kind of got yourself both on from a career standpoint and then found your ultimate mate. But it was a fun piece and seemed at that time totally antithetical, if you will, to the way that Americans grew up and lived. And it was like this — well, it was a 60 Minutes piece, which obviously made it noteworthy, of sort of, 'wow, look at the way that they live versus the way that we live.' And as you're pointing out, we're more and more looking like that, going towards that for sure.
Yeah. Let's — Coco, let's pull up the slide that they have in The Decade Divided as it relates to this number, because Ivy, on this one — this slide, to those that are listening, is just the percentage of 20- to 39-year-olds in America living at home. And as this slide shows, it has increased from 15% back in 1980 up to 22.4% in 2026. And Ivy, let's talk for a moment about the note on this as it relates to every 100 basis point change.
Right. So if you think about the 2020 timeframe when we were at peak at 23.7, you know, it looked like that was only going to be sustained. However, as rates dropped again, COVID came to fruition, we saw a reversal of that. And when we think about that 21.7 — is that likely to keep going lower? You know, we've seen a reversal already reflected in the '25 ACS data showing that more people are staying at home. But what we wanted to show you is that the sensitivity is for every 100 basis point change, plus or minus, that results in an annualized change of about half a million households. So very sensitive to what it means — we're going to add incrementally 500,000 new households, and therefore we need incrementally 500,000 more of supply. That's why it's a very important variable when you're forecasting if we're either in a deficit or if we're balanced or oversupplied.
And that's a super important one if you think about it in the context of what you said on the aging boomer population and the death rate adding in 50,000 units a year, versus if you've got a one-percentage-point or 100-basis-point change in that 20- to 40-cohort living at home, you're going to have 500,000 units of demand coming into the market, or lack of absorption if they stay at home.
Right. Absolutely. And frankly, given the state of the current economy with uncertainty around interest rates and continuing to move higher — today's 10-year with that 4.8 — it's not looking great for any improvement on the horizon, unfortunately. But I was going to say, bigger picture, I think that when you factor in what the death rate or just incremental deaths mean — you know, I think today the average longevity, men and women, is call it 80 years old. You know, we also have that aging boomer and aging Gen X that will benefit the housing market, we think. So it's not that everybody will just die and be gone. You're also seeing benefits like, for example, Pulte Homes has now introduced a product called Explorer product where there are people buying, call it, a retirement home but in their 40s, and it's designed to really accommodate an active family still raising children, but eventually that will be their retirement home. So there's positives within the ecosystem that come from aging, and I just wanted to make sure we address that because it's not all — they're not all dying, but there's benefits as we age of which parts of the housing equation are doing better.
And if you think about — you just commented on interest rates, and interest rates are obviously hugely important to the overall housing ecosystem, and we can dive into that in a moment. But it's really jobs, I would think, that is going to drive that cohort of 20- to 39-year-olds out of home and into forming their own household. And we're at, I think the number is 4.3, 4.4% unemployment in America today. When we saw unemployment come down well into the threes, Ivy, if you look at that graph as it relates to the number of people 20 to 39 living at home, that didn't materially move that trend. In other words, people were still staying at home even as you picked up, you know, almost 100 basis points in the unemployment rate to the positive of getting down towards 3% unemployment. So like, what's the driver there that gets these people moving out? Is there — I mean, I sit there and look at it and say, okay, well, unemployment rate goes from 4.344 down to 4.375. How much does that then bring that living-at-home number down to spur that 500,000 to a million needed new homes from that migration effect, if you will? Is it all related to employment? Is it all related to — I mean, this is back to the question I asked previously as it relates to: is this habits and socio — sort of the way that people are living, or is this more economic?
Well, I think based on the chart that you had up there, if you look at multi-decades, we're showing the decade average, not a point in time. So it's at the end of the decade. And each of the decades has moved, with the exception of 2000 where it moved down. We've been a secular trend moving higher. And, you know, I'll make everyone laugh. My daughter, who's 26 — and she'll kill me, but I'm going to tell it — I couldn't get her to move out. So I bought a car, and the car is going to be here soon. And I told her, I said, 'Listen, our cars are not going to fit in the garage side by side. So you're welcome to stay, but the Cleveland winters are pretty hard, so you'll be out in the driveway and I'll be in the garage.' And guess what? She moved out in June because a real kick in the butt. And she helped the rental market in Cleveland, Ohio, which is quite affordable relative — but as a roommate. So it was a catalyst. I recommend it if you have something similar. But I do think that young adults — you mentioned remote work, more people can work from home. That could also be the variable where employment improving doesn't necessarily drive people to leave as quickly if they're not required to move to a different city. So I think there are a lot of variables. But, you know, back in the '90s, Forbes did a — it was either Fortune or Forbes — the disease of affluenza. And, you know, more families that are affluent or want to be affluent want to create the households that are very comfortable for their adult children. So nobody's really pushing either. I think that has something to do with it. I think that parents are more accommodating for kids living at home longer. And it might be that they finally leave when they get married, and they're getting married later in life. You know, my daughter's boyfriend's 27 and he bought a house. I was like, 'Oh my god, the first-time buyer market, the age is 40 now.' So it was very impressive that he bought his house already. So it's a very different dynamic in today's society than it was when you and I were growing up.
And is there anything in all that we hear — the numbers as it relates to the wealth transfer that's going to come up from the baby boomer generation to the Z's and the Y's and the X's and everybody else? And the numbers are astounding when you look at them on the aggregate. I just had somebody who's in wealth management say to me, over the next 20 years there's going to be $110 trillion transferred from one generation to the next. And I'm like, I can't even get my head around $110 trillion. And let's just say it's only 60 rather than 110. It's still an enormous wealth transfer that's going to happen here, right? In the interim, does that have some impact on the ability for people to go and put the down payment on a new home? Are we seeing the baby boomers be more generous with their kids to underwrite the down payment and help them actually get into their own space? I mean, you just talked about the incentive you put in place. My eldest son just bought a house in Boulder, Colorado, and I was absolutely shocked at how little he could buy for the amount of money he spent. And I was also shocked at — I kind of had some guilt in the sense that we went to look at the house and asked the broker what it was going to take, and the broker said it's going to take a 5% premium over the ask, and if you can close all cash with no financing contingency, you can win this. And I sat there at the open house looking at these young couples who were coming in, and this was going to be their starter home for their life. And, you know, I come with the ability to back up my son to be able to do a 5% premium all cash, and we ended up winning it. And I sort of at the end of the day was sort of like, wow, that gives you a sense of the frustration that these people have. On a per-square-foot basis, it was $890 a square foot for a complete starter home, 1954-built brick construction home in a cul-de-sac where every home was exactly the same kind of cookie-cutter back from 1954. It's a fixer-upper over time, and I'm quite certain that my son will make money on it. But it just sort of — I was sitting there saying, 'Wow, if you're somebody who thought that this was the one you're going to get into, it was a significant down payment to get the house, and all of a sudden we walk and get it basically for all cash because we can do that.' So my question here is, are more people of yours and my generation helping kids, and can we bank on that a little bit over the next five to 10 years that might actually spur some of that increased demand?
Sure. And we believe that the wealth transfer is happening to some extent, maybe not entirely. You know, when you have obviously parents passing or grandparents passing, you get a bigger portion of that wealth transfer. But what we see today is an increase in cash purchases, roughly around 30% right now. We're kind of more in the mid-to-low 20% range historically, but according to the NAR. So I do think cash sales are, you know, indicative or supportive that parents are helping, like yourself. Maybe they're taking a loan against their parents' home or getting a mortgage later, but, you know, my ex-brother-in-law bought all three of his kids homes, and I know many family members and friends that are doing the same. So you definitely have a benefit to the market. If you look at what people own and what generates their wealth, their homes are their largest asset. And so are they waiting until they pass, likely, to pass that home along? But then we have issues with capital gain taxes, and so that's going to be an issue, especially if these homes are larger and maybe older and need repair and remodel. But I do think that the wealth transfer is happening. According to FHA, roughly 20% of the loans for the first-time buyer are actually getting down payment assistance. And I think that that's been an increasing number. And even in conventional, we see the same thing. So we don't have the data to really even aggregate estate sales or know specifically when they're coming to market and where they're being transferred, but we believe that more and more adults are helping their children today in various ways.
So you talked about where interest rates are, and you talked right there about the home being the number one asset in most families' financial picture. And as you and I have discussed in the past, many of those homeowners locked in historically low mortgage rates back in 2020 and 2021 that set them up to continue to accumulate equity in the home because they've got such a low mortgage rate. There seems to be — I mean, you mentioned a 4.80 10-year Treasury, which is having a real impact on both the single-family as well as the commercial and multifamily industries right now. But if inflation is here sort of to stay, Ivy — if we're, you know, Kevin Warsh just came — was in, you know, Wyoming last week in Jackson Hole, and it's pretty clear that he was like, we got to get this thing under control. And so if he's going to raise here, we're dealing with inflationary pressures for quite some time. Are people missing the value of real estate as it relates to an inflation hedge as they look at nominal returns on real estate rather than looking at it from an inflation-adjusted basis?
You know, I think your entry-level buyer doesn't look at it inflation-adjusted. I think when we get into where the market is the strongest, $10 million and higher is hot right now. And if you go into Southern California markets, brokers that are selling luxury homes above $10 million can't sell enough there. There it's very, very strong, and most of the country I'd say that you're seeing that strength. Whereas you go down below $10 million, it gets more challenging depending on where you are. But the most challenged is that entry-level buyer who probably is not sophisticated enough to appreciate the inflation hedge, where that luxury buyer is. And I think that today, you're right, inflation is obviously a concern going forward. And I think one of the things that we talked to a bunch of brokers — we're hosting our housing summit in a few weeks in Boston, and prepping for the conference, talking to some brokers yesterday — but I'm hearing it's not so much that they can't afford it. They're looking at the rate today with a lot of uncertainty, and maybe they could — they called it, you know, 'marry the house, date the rate, date the rate, marry the house.' That was a good idea because even though it's a little stretched for me, in two years I'll refi. And therefore there was the behavioral — it was okay to buy because I can refi. Now they're not clear on what rates are going to do two years from now. So the buyer behavior, at least within the resale market, is uncertainty has really put a lid on overall demand, and we've seen a cooling throughout the summer as we've seen more of the risk that inflation is still, you know, not only a problem but is reaccelerating. But when we look at the
stuck factor and you look at where we were in 2022 and December of 22, 88% of homeowners that had a mortgage were locked in below five and 50% were locked in below 3 and 1/2. Fast forward to today in May of 26, we're now at 68% below five and 39% below 3 and 1/2. And by the end of 27, we'll be at 59% below five and 33% below 3 and 1/2. And I give you those numbers because I do think the stuck factor diminishes people's willingness to give up that low rate. But as it gets better slowly, we call it this grind. You know, life changes and the 3Ds that brokers like to talk about, or the 3Ds of real estate: death, divorce, and I'm thinking default. Those are the three Ds that will drive a transaction no matter what your economy is doing. And then if you add the fourth D, which is discretionary buying, I think the fact that they're stuck mitigates discretionary selling where, yeah, I want a new house. No, I'm not going to give up this low rate. But if I'm getting divorced, you're going to get a new house. You're going to go buy another house. You're just not going to live together. Some people actually still live together because affordability is so constrained, anecdotally. But I think those are some of the dynamics that are in the market today. And I definitely think that the resale market earlier in the spring, we saw green shoots as we approached a 6% mortgage rate and we did see incremental demand because people always say to me, what's the magic rate that's going to make the market healthier? And what we see, it's more about rate of change. And as rates were headed lower, people were getting more comfortable with the idea, okay, maybe it's not the lowest rate in the world, but you know, I'm really missing the opportunity to buy a new home or, you know, buy a resale and fix it up. I think we did incrementally start to see improvement that is now sequentially and unfortunately decelerated.
Do you think that Vessence's move to buy at the long end of the curve and sell at the short end of the curve is going to have a material impact on rates in the market and potentially get the long end of the curve down?
