Walker & Dunlop EVP Ivy Zelman On Multifamily's Resiliency And The Benefits Of Build-To-Rent

The housing market may be in a “slow grind,” said Ivy Zelman, executive vice president of Zelman & Associates and executive vice president of research and securities for Walker & Dunlop, but a theme of cautious optimism continues to pervade the sector. 

On the most recent Walker Webcast, Walker & Dunlop CEO Willy Walker prompted Zelman to address one of the most pressing issues in the housing market today — affordability — and the slowing pace of home sales across the U.S. 

Walker said homes are about 20% less affordable on a relative basis than they have been historically, and the market is facing somewhat of a “push-pull” to get to a place where the household affordability number is normalized. He said interest rate cuts could help to settle the market and cause the purchase market to pick up significantly.

But that all depends on the reason rates are coming down, Zelman said. 

“I think ‘significantly’ might be a stretch,” Zelman said. “When I think about where affordability is today and the [housing market’s] sensitivity to interest rates, it's only in the context [of] a very stable economy. If the economy were weakening and that’s why rates were coming down, that’s a different story.” 

Zelman said today’s housing market, in which roughly 80% of homeowners have mortgages locked in below 5%, disincentivizes people from moving. The general consensus is that interest rates between 5% and 5.5% could be the magic number to get buyers and sellers more active in the market, she said. 

“De-inverting” the yield curve, bringing long-term interest rates closer to short-term ones, would also spur the housing market and potentially help ease affordability struggles, she said.

“As a result of the inverted yield curve we’re seeing today, the spread that we typically see in the 10-year versus the 30-year mortgage is about 100 basis points wider than normal, so there is optimism that if you took those 100 basis points and compressed it to normal, mortgage rates would be 5.5% right now,” she said. “There’s optimism that we don’t even need the Fed to cut rates, but likely a Fed cut would get us a de-inversion.”

It is an “incredibly challenging” environment for today's prospective buyers, not only with interest rates rising as much as they have but with home prices rising more than 6%, Zelman said. Wage growth is also struggling to keep up, and “soaring” homeowners insurance costs and other incremental costs like utilities are weighing on consumers' ability to buy. 

That is why it is still more affordable to rent than own in this market — more than 30% more affordable, to be exact. 

“The widening of this [affordability gap] will create friction in the single-family market, but not as much friction as you'd get from the single-family rental market, assuming lease rates come down further,” she said. 

Zelman is a big proponent of build-to-rent properties because while it is more cost-effective to rent than own, having that single-family experience is preferable to a traditional multifamily unit for many individuals and families. However, the BTR market, like nearly every other CRE sector, is seeing a significant slowdown due to elevated land, capital and labor costs. 

The multifamily market has seen more resiliency and stabilization in rent rates so far this year. Zelman & Associates is tracking about 540,000 multifamily completions for 2024, but Walker questioned whether the market can absorb so many units given current conditions. 

“I think the market is deep enough that it can absorb it,” Zelman said. “The question is, are developers going to be able to deliver in the cycle time that we expect them to?”

Demand is expected to remain high. Zelman said the multifamily sector is expected to be the biggest beneficiary of increasing immigration numbers and the U.S. population’s 100-basis-point projected growth. Coupled with the fact that more young people are leaving their parents' homes earlier than before, Zelman said investors are still bullish on the housing market. 

“There was a lot of negativity perceived by institutional investors in terms of how cyclical [the single-family] industry was, whereas in multifamily, the perception is that it's a very sound investment that generates very strong returns,” she said. “There's still more hesitancy in the single-family, new-construction market compared to the optimism long-term for multi and what a great business it is.”

In the single-family investment side of the housing market, Zelman said cash purchases have spiked in this higher-rate environment. This has made it more challenging at the lower end of the price spectrum to achieve homeownership, but the higher end of the spectrum is still doing relatively well. 

However, a common theme that rings true at both ends is the concept of “aspirational pricing,” where sellers are holding out for a higher purchase price. They are yearning for the peak pricing the market experienced as a result of the pandemic, she said.

In the same vein, Walker said that the price appreciation in the single-family market has been significant, noting that while 3% of homes in 2019 were $1M-plus, that share has skyrocketed to 9% in 2024. Walker asked Zelman whether this is sustainable or if homebuilders have to come back down to earth. 

“Today's buyer wants new,” she said. “A lot of the stock today in the U.S. is very dated. The average stock is north of 50 years old, and we're looking at the Northeast and Midwest even north of that number. I think [developers] have plenty of room to continue to offer and see strong growth in the markets that they're serving.”

Publicly traded homebuilders, such as Toll Brothers, Lennar and D.R. Horton, have grown dramatically versus private builders, Walker said. In the early 1990s, the market share of public homebuilders was less than 10%, but that number has risen to more than 50% of the market. Horton and Lennar alone account for 30% of new home sales, Zelman said.  

Their rapid growth is all about size and scale, Zelman said. 

“The public companies have scale advantages, whether it's buying raw materials or dealing with bulk deals,” she said. “With respect to land purchases, they're making more favorable terms. [But] if a private builder’s in a regional market where they are dominant, well-known and they have a good reputation, I think they can continue to thrive.”

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This article was produced in collaboration between Walker & Dunlop and Studio B. Bisnow news staff was not involved in the production of this content.

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