What’s up everyone

Have you guys heard of poison ivy? Not the plant but the analyst Ivy Zelman who predicted the housing bubble back in 2005 when no one else was talking about it.  She proved to be right as we all know now looking back.

Today we’re going to take a look at an article written by Lance Lambert for Fortune where he talks about Zelman’s predictions right now heading into 2023 and 2024. 

She was right then- so I think its worth seeing her opinion of what’s happening now and where she sees the future of home prices.

So lets dive right in

Lambert writes:

When Toll BrothersCEO Bob Toll tried to say the housing market had bottomed out in 2006, Zelman famously quipped back, “Which Kool-Aid are you drinking, because I want some.” 

As we know now, Zelman’s housing-bust fears proved more than correct as we plunged into a housing recession in 2008 which lasted several years before we turned the corner.

The housing bulls labeled her “Poison Ivy” after she said the housing bubble was at its peak in 2005.

She almost lost her Wall St job because of it and created her own company, Zelman & Associates.  

She continued to forecast a declining market, noting the crash in 2008, and declared the bottom of the housing market in January 2012. 

After that, she was bullish on housing until last year. 

Back in February, Ivy Zelman said we were at the “peak” of the Pandemic Housing Boom. 

If you recall, it was right around then that the Fed reserve stepped in and mortgage rates started to go up drastically which caused the housing market to immediately start to cool down or “correct”.

Fast forward to right now and Zelman has some strong opinions about the future of the housing market.

Lambert talks about Zelman’s bearish assessment of U.S. home prices when she was on the Macro Hive Conversations podcast on July 22 of this year .

Zelman says “So right now we’re getting a backlash of the change in direction from free money to now the rise in mortgage rates and inflation. So the market is poised for a fairly significant price correction. And we’re already seeing signs of that over the last several months. Inventories in certain markets—mostly on the West Coast, Southwest, and Mountain states—are rising at Mach speed.”

Zelman’s forecast model predicts that in 2023 U.S. home prices will fall 4%. Then in 2024 she predicts another 5% drop.

“As fast as inventory levels are rising and demand is plummeting, we could see pretty substantial [home] price corrections. But it’s going to vary by market,” Zelman says. “I don’t think this will just end quickly. This is going to be a very pressured market nationally in 2023 and 2024.”

Take a look at this chart provided by Lambert and Fortune

You can see where he put Ivy Zelman’s forecast by the red lines all the way to 2024. 

Zelman’s outlook amounts to a 8.8% drop in U.S. home prices between 2022 and 2024. 

We haven’t seen a drop in home prices like that since 2008-2012 and before that back in 1992 where the dip doesn’t look like it was nearly as bad.

Let’s compare it to Corelogics graph published on Sept 6, 2022 which shows a comparison of the national year-over-year percent change for the CoreLogic HPI and CoreLogic Case-Shiller Index from 2000 to present month with forecasts one year into the future that was provided by Moody’s Analytics. 

The red bars are the hpi forecast and the light blue line is the case-seller index forecast

Dark blue is case chiller index based on home prices. So you can see that the blue line shows home prices going up since 2020 until this year when it starts to go down. 

The light blue line is their forecast for the future into 2023 which hasn’t been this low since 2012. 

Corelogic is now predicting home price appreciation slowing to 3.8% by July 2023.

Selma Help, the deputy Chief Economist for Corelogic says: “Following June’s surge in mortgage rates and the resulting dampening effect on housing demand, price growth is taking a decisive turn. And even though annual price growth remains in double digits, the month-over-month decline suggests further deceleration on the horizon. The higher cost of homeownership has clearly eroded affordability, as inflation-adjusted monthly mortgage expenses are now even higher than they were at their former peak in 2006.”

So, their forecast has been declining month over month, but Corelogic still has prices appreciating 3.8% year over year. 

And as reported in my video a few weeks ago, Zillow’s outlook for home prices has been revised down significantly to 2.4% home value growth through the end of July 2023. 

As for Fannie Mae, Freddie Mac, the Mortgage Banker’s association and Goldman Sachs – they all are still predicting low single digit home price appreciation for 2023.

So prices may not go up a lot, but they are still expecting some price appreciation. 

But back to Zelman. 

Lambert writes in Fortune, If Zelman’s prediction holds true, Fortune would have to shift our branding from the Pandemic Housing Boom—a period that saw U.S. home prices soar 43% in just over three years—to the Pandemic Housing Bubble. 

Lambert does explain that this forecasted drop is still more of a housing correction than a housing crash—something that the industry says requires a 20% price drop. 

Between 2006 and 2012, U.S. home prices fell 27% 

And Zelman isn’t the only one predicting prices to decline in the next few years. 

Moody’s analytics expects U.S. home prices to decline from 0% to 5% nationally. If a recession hits, that Moody’s forecast moves to 5% to 10%, respectively.

And several weeks ago, Fitch ratings came out with a forecast of prices falling between 10% and 15% if the housing market continues to get worse.

Now, as I always say, real estate is very localized so what is happening in one part of the country isn’t necessarily what is going to happen in another part. 

Housing markets that became overvalued in the last 2 years will most likely see the more significant price drops. 

According to Moody’s Analytics these include markets like Boise (overvalued by 72%), Charlotte (overvalued by 66%), and Austin (overvalued by 61%). 

The vast majority of these significantly overvalued markets are concentrated in boomtowns in the Mountain West and Sunbelt that benefited from the pandemic’s work-from-home trend.

Take a look at this map which shows the 183 markets Mark Zandi, (the chief economist for Moody’s Analytics) believes are overvalued by more than 25% and will  see home prices decline by -10% to -15%. 

If a recession hits, Moody’s Analytics expects those 183 significantly overvalued regional housing markets to decline by -15% to -20%.

Mark Zandi tells Fortune that factors including “record low vacancy,” “very good underwriting,” and “plain vanilla lending” won’t be enough to prevent a single-digit drop in home prices. 

However, it will prevent the U.S. housing market from slipping into a full-blown “housing crash.” This time around, Zandi says, homeowners are in much better financial shape.

I agree with him in that homeowners are in much better shape financially. 

We don’t have the sub prime interest only loans that were omnipresent back in 2008 that caused a lot of people to be underwater in their mortgage because they couldn’t afford the increased payments after the initial 2 or 3 year interest only payments expired.  Add the huge influx of inventory arising from short sales and foreclosures coming on the market, home values went down significantly and more people were unable to afford living in their homes.

Today, homeowners have had to adhere to a stricter loan criteria to get a loan and as a result they are more able to whether the storm of a correction in home values. 

And, well, if some of these industry insiders are correct, and home prices appreciate – even a little- over the next few years, then most people should be ok.

What worries me is those people who bought in the last 2 years that may have bought more than they can chew as the saying goes. 

I hope they are ok because there is no doubt home prices have started to correct in the last 6 Months – how much depends on where you live.

Here in the DC area, if a house is in a good location, well priced – meaning priced appropriately for today’s market, and good condition, it will still sell quickly and most likely with multiple offers. 

It’s more important than ever to work with a professional and price your home according to what’s happening in todays market, not to price it according to recent comps in the last year. 

WHat’s happening where you live?

Are you seeing multiple offers still or only price reductions?

Comment below.

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