Episode 41: 2020’s Boom, Mini-Bust, and Boom
Transcript
Dean Wehrli:
Welcome to the New Home Insights, a John Burns Real Estate Consulting podcast about the US housing market. I’m your host, Dean Wehrli. Today we have Jody Kahn, Senior Vice President, and Devyn Bachman, a Senior Manager from JBREC. We had them last year, and actually I think that was one of the most uploaded episodes we’ve ever had. Jody and Devyn constantly keep their finger on the pulse of the housing market, both nationally, regionally, and locally. They survey builders, brokers, and lots of other folks, and they routinely bring us insights on current market conditions. This means unless you’ve been obsessing on the new Haunting of Hill House sequel on Netflix, like some of us have, you know that today we’re going to be pretty upbeat generally. The market is doing great. The new home market as a matter of fact, to use Jody’s words, it has been fantabulous. I believe that’s a direct quote, Jody.
Dean Wehrli:
So, today we’re going to cover these current market conditions, but we’re also going to let Devyn and Jody weave us through the craziness of the housing market for all of 2020. Devyn, Jody, why don’t you quickly just give us a brief little idea of what you do here. Start with your birth and take us forward. Jody, why don’t you start?
Jody Kahn:
Okay. In the interest of being brief, I’m just going to tell you more about our work. As you said, Dean, we do a lot of survey work. When I joined the company 13 years ago, I initiated our monthly builders survey, and we’re typically looking at responses from something like 350 to 400 builders every month. About a third of our sample is usually public home builders, and the ballast will be executives with private building companies. I think you mentioned our land survey too, which is a reach out to the top land brokers across the country giving us opinions on the residential land market. And I’ll pass it to Devyn.
Devyn Bachman:
All right. Thanks, Jody. Well, I help her accomplish all of the pieces she just mentioned. Another survey that we launched last year was the single family rental survey, so that’s the newest of the products that we cover. But we also spend a lot of time servicing our clients: talking marking conditions, results, and monitoring the markets for them nationally and communicating that to them.
Dean Wehrli:
Right on. Thank you. I noticed you both didn’t start with your births, so whatever. Fine. Don’t listen to me.
Dean Wehrli:
So, let’s start with the here and now. Let’s do a scale. On a scale of 1 to 10, how would you rate the housing market today? Devyn, why don’t you start?
Devyn Bachman:
Yeah. I think it’s easy to give demand a 10 out of 10. On the other hand, supply is becoming a bit of an issue, so maybe I give that about a 7 out of 10. So, we end up somewhere around maybe about an 8.5 overall for the housing market. As I mentioned, demand is through the roof, but supply challenges will hinder growth over the next few quarters.
Dean Wehrli:
By that you mean supply is getting pretty tough? It’s tough for buyers to find a home. Is that-
Devyn Bachman:
Yeah. It’s difficult to find a finished inventory home. It’s difficult for the builders to find finished lots, and it’s difficult for them to find new land positions.
Dean Wehrli:
Jody, how about you?
Jody Kahn:
Well, let’s see. I agree with Devyn that the new home demand gets a 10. I really have never seen demand like this in my career. I don’t know about you, Dean, but it’s pretty intense this year. The supply could be a seven or so now, but I also think we’re going to see supply get worse. Maybe supply would be about a five by the start of 2021 because of some of the things Devyn just mentioned. The builders have the lot caps. There’s a lot of building product delays, and the jurisdictions are causing a lot of delays for permits and inspections. So, that all means fewer houses make it to the finish line.
Jody Kahn:
On the positive, though, the pricing is really strong with monthly increases by most builders and also some really big year-over-year gains we’re going to talk about. So, I’d say pricing gets a 10 rating too.
Dean Wehrli:
Yeah, okay. Well, unless you’re a home buyer, maybe not so much. Now let’s get into our way back machine. Richard, we should have a sound effect for our way back machine. No, let’s not do that.
Dean Wehrli:
So, this year COVID-19 changed the world. How was the market doing before that occurred, early 2020?
Jody Kahn:
I think it’s great to set the scene because really, 2020 began with a bang for the home builders. The builders came into the year with really big backlogs of sold homes and they were seeing a very strong spring selling season. So, why did they come in with the big backlogs? The 30-year mortgage rate dropped 100 basis points to 3.6% in September of 2019, and that triggered an unusually strong fourth quarter of sales. So, when we look back in fourth quarter, there was an average 32% year-over-year increase in the new home sales, according to our monthly builder survey. And really, the fourth quarter is usually a sleeper for the builders and more about, “What can I build and close,” than “What can I sell?”
Jody Kahn:
Then, in January and February of this year, the builders’ sales jumped 32% and 34% year-over-year, respectively. So, as you can imagine, Dean, with that kind of sales lift, the builders have started raising prices like crazy. Forty-four percent had raised prices month-over-month in January this year, and another 58% did so in February. So, by February, we were looking at 5% average year-over-year price appreciation on new homes nationally. Once you sell all those homes, you’ve got to start them, so the builder starts also jumped 24% year-over-year. That’s on average over the fourth quarter and then followed up by 21% growth year-over-year in January and another 14% in February.
Jody Kahn:
So, leading into the initial COVID event, we were rating 25% of the top housing markets in the country as strong markets and 62% as normal markets, and that’s based on our monthly discussion of the sales pieces and also the pricing environment. And in contrast, back in February 2019, we had no markets rated strong. But based on how solid everything was coming into that COVID event, we materially increased our single family permit volume and our new home price forecast for most of the metros.
Dean Wehrli:
That second to last point is really interesting to me, that we had no markets in the entire nation rated strong going into February 2019 year-over-year. It’s easy to forget now how good things were going prior to COVID-19, isn’t it?
Jody Kahn:
Mm-hmm (affirmative). It is.
Dean Wehrli:
So, what happened? The stay-at-home restrictions hit. The economy, we know, is going to get hit. What happens then, back in… really started mid-March in the United States when COVID finally started impacting the market? Devyn, why don’t you take that?
Devyn Bachman:
So, at that point, the housing market froze but only for a very short period of time. So, Jody just spoke to our new home sales and pricings ratings and how we had a number of markets rated as strong. Well, by the end of March we had downgraded every single market in the country to either slow or very slow. But builders were quick to pivot. They started offering by appointment only showings in order to comply with the safer at home orders. They offered more Matterport, which are virtual tours, via their webpages. They added additional sanitational protocols. And all of these things were frankly unmatched by the resale market, so there was really this trajectory to favor new. But they also paused land acquisition efforts and spec construction in tandem with increasing discounts, which, not to give away the ending of this story, are a direct cause of some of the supply-related issues we’re seeing today.
Devyn Bachman:
Cancellations also spiked. Buyers and builders were forced to terminate contracts due to higher FICO score requirements. But also, the new 24-hour job verification policy, which easily uncovered any recent job losses. Also, home building wasn’t deemed essential in several northeast, northwest, and northern California markets, so those builders were largely inactive. But, about mid-April, we were hearing that some of the housing markets had begun to dramatically improve.
Dean Wehrli:
So, that was kind of the green shoots, the first hints that things were getting better? For me, I remember this. I was looking at the total sales level measured against net sales, that is sales minus cancellations for the net figure. So, we very quickly started to see total sales slowly rise, that is people who are buying a home in the full flush of COVID restrictions, all the economic dislocation, they were still buying homes and that indicated there was still a market out there. But the rash of cancellations, which were people who were people who bought homes before COVID, disguised this to a degree.
Dean Wehrli:
So, as you guys were looking at it then and looking back, what were for you the first green shoots in the early stages of the COVID impact?
Jody Kahn:
It’s interesting that through our survey work, Dean, we had started to see improvement by the third week in March, whereas I think a lot of people perceived that the improvement started in April. We were definitely ahead of the game in telling our clients that builders who had the virtual tours already set up on their websites started reporting more searches and also more appointments, those one-on-one appointments, than these builders were expecting.
Jody Kahn:
And honestly, the traffic numbers were remaining low, but the buyer urgency was already showing to be really high. One of the things I think about back at this time and how challenging it was, remember that cleaning supplies were actually really hard to come by for a while, like Clorox wipes, things like that. And this was really challenging the builders who were trying to offer those appointments and allow the buyers to tour the models unaccompanied, because they had to clean pens and doorknobs and do a full cleanup before they could let the next group in. In fact, the president of one of the really big public home builder divisions told me she was scouring stores for supplies as soon as those stores opened every morning just to support the sales appointments and keep the model tours going. So, that tells you how crazy it was.
Dean Wehrli:
That was a division president, right, Jody?
Jody Kahn:
Yeah.
Dean Wehrli:
A division president?
Jody Kahn:
Yeah, exactly. Normally the division president would not be out shopping for Clorox wipes.
Dean Wehrli:
Yeah. That’s very true.
Jody Kahn:
They have a few other things to take care of. One of the parts I thought was really interesting, looking back, is that the builders had to work out how they could close homes because escrow offices were not open, et cetera, so they started using DocuSign online notaries and even digital county recordings. And this took a few weeks to really work the kinks out, but I think those things are here to stay too.
Dean Wehrli:
Yeah.
Jody Kahn:
Now that they’ve figured out the mousetrap. We started to hear too from the builders that residents of some of those really stricken northeast metros, and I mean like New York and Boston, were buying homes 100% virtually in other markets. And some of these folks had previously visited a community but a lot of them had not, so truly virtual transactions happening for the first time for a number of builders. And then buyers started calling the builders wanting to know if they could actually close their homes that were under contract sooner so they could get moved in. At least one builder received a buyer request to rent a model home because this family was so anxious to move and have a better place to live. I don’t think the builder pulled the trigger on that one.
Dean Wehrli:
Yeah.
Jody Kahn:
So, then the first segment that really started to show a clear sales pickup was the entry buyer segment. We think that some of these folks were actually shopping around pre-COVID and they just hadn’t committed, and they got stalled and then these stalled buyers were joined by other entry buyers who were really anxious to move out of those dense apartments.
Dean Wehrli:
Yeah. In fact, that’s another green shoot that we saw very early on was the searches, like Google searches for new homes were shockingly recovered very, very quickly and then started surpassing year-over-year numbers early on when things were still pretty dire in terms of the pandemic. So, builders and buyers were figuring it out pretty quickly in this process. Were all the buyers though back in the market right away, or were there some discrepancies you saw there between different buyer types?
Devyn Bachman:
No. As Jody mentioned, the entry segment was absolutely the first one to show its strength. And today people are even willing to partake in overnight camp outs to get a home or a lot they want. No, I did not say for a TV. This is for a home or a lot. Next, we saw the move-up market begin to soar, led by homeowners desiring more space inside and outside their homes. These family buyers now had to deal with the reality of having multiple people under one roof working and studying, and from personal experience I can tell you it’s not easy. And they were quick to realize they needed more space, better configurations, and they needed it now.
Dean Wehrli:
Yeah.
Devyn Bachman:
Also, people became more comfortable listing their homes on the MLS, which relieved some of those contingency issues. Then, the luxury and second home markets began to surge as the stock market improved and mortgage rates remained low. Many buyers chose to leave the dense urban expensive coastal markets, relocating to places like Nashville and Denver and Austin where they could get more home for their money.
Devyn Bachman:
A Boston builder and his wife even told Jody and I that they regretted moving into an urban townhome when they realized they didn’t have enough space to self-isolate if they ever needed to. Then, their son came home from college and the downsized home they’d so desired felt pretty crowded.
Devyn Bachman:
Since many people today are foregoing traditional vacations, they’re also purchasing weekender pads in places like Palm Springs, Lake Tahoe, and Naples. And by the way, since there’s plenty of work from home permissions, people are using these as primary residences today as well.
Devyn Bachman:
And then last but certainly not least, we have the active adult buyer. Sales to this segment are finally reaching pre-COVID volumes, but they’re not escalating past them like the other cohorts. Their susceptibility to the virus and their preference for in-person sales has led to a slower than normal return.
Dean Wehrli:
Yeah. I’ve seen that here too. It seems like, exactly right. They have kind of gotten back to where they were. Otherwise, most new home projects have soared, are doing better year-over-year than they were at the same time in 2019. But still, we have seen the recovery here out in northern California, central California, Reno. We’ve definitely seen recovery in that age-qualified space as well.
Dean Wehrli:
So, demand surges in April and especially in May and June, what happens after that? And I’m going to ask you to bring some receipts with your response, Jody, so go.
Jody Kahn:
Well, I’m going to say that things were so robust that you started seeing some chinks in the armor, so to speak. The finished inventory per community started falling really quickly because the buyers were snapping up anything that represent a quick move-in opportunity. And we saw the inventory number go from roughly 1.8 homes per community nationally from January through May dropping suddenly to 1.5 finished homes per community in June. And now in September, just below 1. So, the inventory got snapped up quickly, for sure.
Dean Wehrli:
There’s those receipts I knew you had. Okay.
Jody Kahn:
Yeah, yeah. And then the builders resumed the land transactions that Devyn mentioned they had paused in March, and really the motivation was that the strong sales were just eating through their lots’ positions and also their open communities ahead of schedule. This appetite to replace those lots started creating a land grab environment, and today we see prices being driven up really quickly because everybody’s of course competing for the same lots and land.
Jody Kahn:
Another factor is that the construction build times that extended during March because of labor staying home and nobody at their offices have only increased since the sales started skyrocketing. This is where you start feeling like the maybe the wheels are going to fall off. We were able to measure the build times pre-COVID and post-COVID, and we found that the build times extended by 10 working days on average nationally. But in the southwest and Florida and Texas where the sales were just really robust in our survey, we saw extensions by 18 to 38 working days. I mean, that’s a lot. Adding to it the building product gaps and delays have been pushing out closing dates even further with no end in sight.
Jody Kahn:
We’ve heard that some builders are storing lumber kits in rented warehouses, and we’ve been encouraging our builder clients to speak with suppliers and create contingency plans because there are a lot of issues with lumber. But we’re hearing more problems with appliances now too. And since you know that the appliances are typically installed just before closing to avoid theft, any delay there at the very end is very costly to the consumer, who is anxious to move in, and to the builder trying to get their revenue out of that home sale.
Jody Kahn:
So, one of our builder clients is storing appliances in a rented warehouse to have more control over the supply and timing. And just this month, one of the luxury builders in our survey mentioned they stopped selling appliances with these luxury homes. They’re instead giving buyers credit that they can go and purchase appliances on their own. But I’ve been hearing too that Home Depot and Lowe’s are not exactly able to deliver quickly either.
Dean Wehrli:
That’s sad. All I would need would be a blender. The washing machine and that kind of stuff could wait.
Jody Kahn:
I was thinking a grill-
Dean Wehrli:
Okay.
Jody Kahn:
Because you can definitely grill out. Even if you don’t have a kitchen appliance, you can at least get some food on the table.
Dean Wehrli:
Yeah, but the cocktails… I don’t know. I’d have to think about that.
Jody Kahn:
Yeah, maybe a mini fridge. So, with the tight supply that we’ve talked about and the material and labor costs starting to escalate quickly, we’ve seen those material and labor costs rise by nearly 10% year-over year as of third quarter. And that’s doubling from 5% year-over-year just one year ago. Did you have a question there?
Dean Wehrli:
Yeah. Finish your thought, then I was going to ask you a quick off-the-cuff question.
Jody Kahn:
Okay. Well, we look at with the rise in cost is mostly materials, mostly labor, or both. And it had been for a while mostly the labor, but now it is definitely the materials, like lumber and appliances that I just mentioned. And speaking of lumber, the cost increased by 59% year-over-year on average in our latest survey, dwarfing every other product or construction segment.
Dean Wehrli:
Yeah. We’ll have to have Todd Tomalak and Steve Bastian on one of these days, our building products folks here at JBREC. And we talked about that actually with the podcast with Home Depot just a little while ago.
Dean Wehrli:
I was actually going to ask both of you: How surprised were you that conditions did recover so quickly? I don’t think anyone saw it. On a scale of 1 to 10, 10 being utterly shocked and I wet myself, what’s your response? Because I was a 10, I’m not going to lie.
Jody Kahn:
Okay. I’m going to say may an eight, because we’re so plugged in with what’s happening with the builders and the brokers and realtors that we did hear about those early shoots. So, it didn’t surprise me that enterprising folks were going to figure out some ways to get some business done. But the urgency of the buyer and all of these different cohorts coming to the market trying to improve their living conditions, I don’t think we could have predicted such-
Dean Wehrli:
Jody? It looks like Jody might be having an audio issue there. We’ll wait for her to come back on here. Meanwhile, Devyn I was mentioning… I meant that in the sense of you’re right. We did see some green shoots early on in the process that things were to come back, but I guess the fact that things are literally better year-over-year than in 2019, that’s what I think was so surprising to a lot of folks, that it has come back and then passed it right by, I guess.
Devyn Bachman:
Yeah. And I think it shocked everyone initially, but now as we’re able to sit back and digest what happened, it all makes perfect sense. When you’re in the midst of a pandemic and there is a virus out there that, to be honest, is a very scary concept for most of us, your front door suddenly becomes your security gate to the rest of the world.
Dean Wehrli:
Yeah.
Devyn Bachman:
So, a home has never been more important from that standpoint. So, maybe a few months in we were all looking around wondering what was happening, and today it’s not quite as surprising when we look back.
Dean Wehrli:
Yeah, okay. But it’s always not a surprise when we look back, isn’t it?
Devyn Bachman:
That’s true. Hindsight bias.
Dean Wehrli:
Exactly. Let’s talk about supply. So, low supply combined with this very strong demand that we are seeing, that’s a recipe for what?
Devyn Bachman:
It’s the perfect recipe for price appreciation, and boy are we seeing that play out today. In September, 84% of builders raised prices month-over-month, resulting in 8% year-over-year price appreciation, doubling the 4% of one year ago.
Dean Wehrli:
Wow.
Devyn Bachman:
So, some of this pricing power is builders trying to manage demand, which, quite frankly, is not working after seeing four consecutive months of 60-plus percent year-over-year sales rates. But the other part is the management of the costs, which Jody just spoke to. These quickly rising construction costs are encouraging builders to raise prices in order to protect and grow their margins.
Dean Wehrli:
So, just because you guys are my colleagues here at John Burns Real Estate Consulting, that doesn’t mean I’m not going to put you on the spot like I do most of my guests. So, get out your crystal balls. Actually, I think I need to think of a new symbol for forecasting, so get out your sheep’s entrails and tell us about your thoughts for, let’s say, near-term: quarter four and quarter one of 2021.
Jody Kahn:
Well, I think that we’re going to see continued strong demand for homes through fourth quarter and into 2021 because there’s so many different buyer groups that are motivated to buy homes to meet their needs, whether they’re coming out of dense urban environments or apartments for various reasons. Kids home from college. I do think we could see some seasonal slowing in fourth quarter, and I base that on our survey of September in which the average sales rate stayed either flat or declined month-over-month in all regions for the first time in many months. That would be seasonally normal, so even with strong demand we might see things fall off as we get to the holidays.
Jody Kahn:
We do expect to see some additional buyer types, by the way, become active shoppers, including some that nobody was really expecting to move. During the shelter in place environment, I think we all acknowledge the importance of being near family or having some kind of a strong support system. So, I think that more empty nesters are going to sell their homes and move closer to their kids, but it could happen the other way around actually because the kids can move because of work from home, school from home, et cetera. But I guess my point is we’re going to see some parties move just to get closer to that support network, keeping the eyes on mom and dad or the aunt or whomever.
Jody Kahn:
The other thing I think going on that is just starting to unleash is that families are reconsidering how they’re going to take care of those aging relatives. Those mortality rates at the senior living centers were just terrifying, and then there was that imposed isolation where nobody could visit and even check on their relatives. So, some fairly settled families that probably had no intention to move are either going to remodel or maybe move to new homes with these customized main floor layouts that are going to accommodate the elders living in with them and also whatever home healthcare support might be needed: equipment, people, et cetera.
Dean Wehrli:
So, even more multi-generational than we’ve seen, which is already a pretty major trend?
Jody Kahn:
Yeah, absolutely. Because people started living multi-generational when the kids came home from college and never returned, but not everybody was set up for everybody learning and working and zooming, what have you, from home, so that is necessitating some changes. So, yes, even more multi-gen living. And I also think the costs to build a home are just going to continue to rise, and the builders will keep raising prices as well because they have the strong demand and the short supply we talked about. But also, they need to cover those rising costs, so by later in 2021, Devyn and I are starting to think about affordability issues again. We could see some challenges emerging for some buyers even those the rates are going to stay low, based on our forecasting.
Dean Wehrli:
Let’s end this then with one more question, put you on the spot. If you had to pick one indicator that you think folks should watch going forward, what would it be?
Jody Kahn:
I think it is the pricing, and our survey tells you so much, or pricing in general but we just have a very accurate measure. The prices are rising when builders are confident about the velocity, and strength, and continuity of their demand. And also, it’s very reflective of what’s going on with rising land costs, rising costs to build with materials and labor, so I would say pricing.
Dean Wehrli:
How about you, Devyn?
Devyn Bachman:
Well, Jody stole my thunder and chose pricing.
Jody Kahn:
Sorry.
Devyn Bachman:
So, I think I’m going to have to go with inventory, because if we do not see a solution on the inventory side, eventually that will dramatically affect demand.
Dean Wehrli:
I’m going to agree to disagree. I’ll actually agree with both of those, but I would look at mortgage rates because I think mortgage rates are… I don’t know if propping up is too strong a word, but mortgage rates are such a huge part of this recovery and this continuation of the strong demand. I think I have a really, really close eye on mortgage rates, and we do expect mortgage rates to stay pretty darn tame for the indefinite future.
Jody Kahn:
Right. And the Fed has been telegraphing that they intend to keep rates low, which is why I chose pricing.
Dean Wehrli:
Gotcha. You were a step ahead of me.
Jody Kahn:
I’m quick like that.
Dean Wehrli:
Okay.
Devyn Bachman:
She’s a step ahead of most people always, Dean.
Dean Wehrli:
That’s very, very true. Very true. Well, thank you guys, both of you, Jody and Devyn. This has been another very informative look at the market here and an update on how the market is doing. I appreciate it.
Jody Kahn:
Our pleasure. Thanks for having us back.
Dean Wehrli:
Absolutely. That was New Home Insights, the John Burns Real Estate Consulting podcast. I’m Dean Wehrli. Thanks for listening. Please listen next time. That sounds too needy. Listen next time if you want, all right? Until then, see you.
If there are any other podcast platforms that you used where you have trouble finding our podcast please send us an email with your recommendation.
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