New Home Insights Podcast Episode 64 Transcript | John Burns Real Estate Consulting

Episode 64: Buckling Our Seatbelts for an Interesting Ride

 

Transcript

 

Dean Wehrli:

Welcome to New Home Insights, the podcast by John Burns Real Estate Consulting. It’s about all things housing. Today, we have the guy whose name is actually on the door and on the banner. We have John Burns, the founder and CEO of John Burns Real Estate Consulting. John, how are you doing?

John Burns:

The guy whose name is on the door, but doesn’t do any of the work, right, Dean?

Dean Wehrli:

Oh, come on. If that was true… It’s not. So, let’s dispense with a long bio, since everybody knows who you are. I’ll just call you the preeminent housing market expert and researcher in North America. There were some pretty good South American housing economists, I’m not going to lie about that, let’s not be ethnocentric. But you’re the best here for sure, let’s be honest. You don’t disagree.

John Burns:

I’ll disagree, my daughter will definitely disagree with you on that one.  I am with one of the preeminent podcast hosts for the industry through, so you have to agree with that one, so there you go.

Dean Wehrli:

You know, that’s true, I’m not going to deny that, for sure.

John Burns:

Thank you.

Dean Wehrli:

Today, we are going to talk about the state of the housing market in a pretty holistic way. Where we’re heading, where we are. We’ve had about two really intense years of just a pretty crazy housing market here now, but we do sense that things are starting to flux a little bit, and there are starting to be some changes coming in the market. So, that’s where we’re going to focus on today. So, let’s just get right to it, let’s start with the big picture stuff, let’s start with kind of those major, major indicators, like sales and price, and that everybody is concerned with. So, price, old friend, home prices. Nationally, where do you see prices going here, at least in the near term, next couple of years?

John Burns:

All right, so we’re recording this on May 31, 2022. So, prices are continuing to head up as we speak. They’re not as crazy heading up as quickly as they were before. I think that’s going to change, I don’t think that’s going to change this year for homes that are on the market at a reasonable price, homes that were maybe priced a little silly in the spring, maybe have to come back down to early 2022 pricing. But, mortgage rates go from low threes to low fives, Dean. That hurts. So, it wouldn’t be surprising for the market to soften here a bit.

Dean Wehrli:

It can’t not have an impact. And I think most folks are pretty well-attuned to that, you see very few people who are just in complete denial. Do you? Do you see anyone like that?

John Burns:

Really, that’s kind of interesting. I haven’t run into anybody in denial, so you’re right. In the prior cycle we definitely have-

Dean Wehrli:

Remember the softer landing, the-

John Burns:

Oh, yeah.

Dean Wehrli:

The ubiquitous soft landing that was never going to happen. I haven’t heard that kind of over-optimism here.

John Burns:

Oh, I hear a lot of soft landing, yeah. But a soft landing means things are going to be fine, and frankly I kind of agree with that until something comes along that we all don’t see, and then let’s hope that doesn’t happen.

Dean Wehrli:

But a soft landing, that was at the end of a market that was truly a historical, and had been nuts for several years, not just a couple of years. That’s I guess what I mean.

John Burns:

No, you’re right. But, to use some of our stats, so during the 2000 to 2005 period, the housing costs in relation to income grew by 36%. It’s grown by 36% in the last 16 months. So, it didn’t last as long, but damn, it happened quickly.

Dean Wehrli:

That’s true, it’s been pretty concentrated. It’s kind of a concentrated run up here.

John Burns:

Exactly.

Dean Wehrli:

But still, we’ll get to some fundamentals here in a few minutes. But, are there any regions you see different? Do you see kind of a national movement, almost a national market, or do you see some regional differences coming up?

John Burns:

Rising mortgages hits every market equally, but every market is super different right now. I mean, the Texas markets have more housing under construction than ever before. I mean, there’s no under supply of housing there. Here where you, I are in California, a lot of other markets are buildings a fraction of what they used to build. But you know what? Everybody’s moving to Texas, and to Tennessee, and to Georgia, and Florida, where they can build more homes, and it’s affordable. So the demand is in the South, the supply is in the South, the horrible affordability is on the coast like it’s always been. But, every market’s gotten a lot more expensive in the last 18 months.

Dean Wehrli:

Yeah. How about niches, or buyer segments? Do you see entry-level getting hit harder because of mortgage rates, let’s say, than the move up markets?

John Burns:

I think entry level and the resale market is getting hit the hardest, because that’s people who were going to be able to buy a home, and now literally cannot. The entry level in the new home market is a higher price point, maybe some of those people would be pushed to the resale market. You know, one of the many, many things that is unique about this cycle is this whole shift to being able to work from anywhere for a lot of people is a huge affordability solution, to tell somebody, “You only have to come into work three days a week. That gives you the hall pass to drive seven miles further from the office, where it is more affordable. And you can take your $100,000, your income with you out to where everybody makes $80,000, and you can afford the home pretty easily.” And that is what we’re seeing.

Dean Wehrli:

In northern California, put a zero on that mileage, at least. Right, I mean they’re literally able to move out to a different MSA, to afford what they could never have afforded.

John Burns:

No, you’re right. Or they might have gone out to the East Bay, now they can go to Tracy, or now they go all the way to Lathrop.

Dean Wehrli:

Yeah, or even Sacramento, although that’s becoming less so as we… We’ll see. I mean, just… Not to get sidetracked, but do you see… What is your crystal ball on that whole question of office pullback, you know? We’ve had Apple try to, kind of fail at doing it, by pulling folks back. Do you see that? Because that’s not just Northern California, every metro area is going to be impacted by that.

John Burns:

Going back to that demographics book we wrote in 2016, I mean, we called the labor force shortage because it was perfectly predictable. We’re all getting a year older, a lot of people are going to hit retirement. I think we’re going to be in a labor shortage for a very long time, until they… If they change the border rules. But even if we go back to normal immigration, that’s going to mean the war for talent is going to be strong, and a lot of companies are going to have to learn to figure out how to hire hybrid employees, or work from anywhere employees, to get great talent. Particularly in your market, I mean, to pay somebody to live in Santa Clara, you have to double their pay from living in Sacramento. It could make a lot of sense to pay somebody more, really well in Sacramento. But not our employees, we did lose a couple of people who got picked off like that. I didn’t like it.

Dean Wehrli:

Yeah, yeah, so yeah, we’ll see. It’s interesting. It’ll be an arm wrestle, and right now actually with hiring softening at some of these tech employers, maybe they’ll get a little bit of an upper hand in that wrestling match. But right now, yeah, you need to do… Like I said, Apple tried and has really backed off of forcing folks into the office so far.

John Burns:

Well Dean, you remember, I did a presentation so I know the date, April 27 2020, when we figured out we’d gotten through it and all those sorts of things. We said, “We’re going on offense. We know how to hire people who work remotely, because we’ve been doing it forever.” And we hired a ton of talented people, so I hope Apple and everybody else keeps forcing people back into the office. Send your best people my way. And there’s a lot of great people that love to work in the office too, I’m not saying it’s only one or the other. I just want lots of great people.

Dean Wehrli:

Yeah, flexibility I think will be the key. That includes you, Mark at Meta. I’m sorry, Facebook, be honest, nobody’s going to call you Meta. So, let’s get back to home prices. Don’t you think that builders will do almost anything they can, at least initially here, not to lower prices? They can do things like add incentives, or they can get rid of those fake premiums, those kind of heightened and even sort of artificial premiums we’ve seen? Won’t they choose those strategies first?

John Burns:

You know the game, Dean. So, we’re going through the game right now where you have to, “Protect your backlog,” which means don’t show somebody in your backlog that you’re selling homes for less, then you’ll screw up the appraisal and everything else. So, everybody’s protecting their backlog, which is an abnormally long backlog right now because it’s taken so long to finish the house. Then, once we get to standing inventory, which we usually have two homes that are ready to move in in every community. Today we only have one home that’s ready to move in in every four communities. So, nobody’s got any standing inventory at all, so why you would be dropping price when you’ve got nothing ready to move in is a little crazy.

I do think some of the biggest builders out there that are real behemoths and going after the market share will probably start doing it at some point, partially because the margins are so strong too, it’s pretty easy. And that’s usually how it progresses, to eventually then somebody opens up a new community just at a new lower price. But, that won’t happen for quite a while either.

Dean Wehrli:

Yeah, so far in the markets I’m in I have not seen any price decreases. For sure it’s slowing, calming things down, absolutely. But not actual decreases, not yet.

John Burns:

It’s way too early. People forget how long this takes, so a little history lesson here. So, the market peaked in October 2005, but it was February 2006, in Sacramento where I started seeing the first heavy discounting. The mortgage insurance guys, the sub-prime lenders blew up in ’07, and Lehman Brothers, because of their real estate exposure, blew up at the end of ’08. So, it really was three years from peak sales volume till Lehman Brothers blowing up, till things got really tough. If it’s going to get tough, it just takes a long time here. I certainly hope that nothing like that happens again. It is certainly not going to be happening from the mortgage industry, because mortgages are very well-underwritten these days.

Dean Wehrli:

Yeah, we’ll talk about… Let’s come back to that, circle back to that in a minute. Nationally though, I wanted to continue real quick on incentives, right? Eventually we probably will see some heightened incentivizing. Have you seen yet the most obvious, logical one seems to be some kind of a rate lockdown or rate buydown. Nationally, have you noticed any of that happening yet?

John Burns:

Dean, you’re asking all these negative questions, this isn’t like you.

Dean Wehrli:

No, I mean, that’s not a… I mean, those are fairly cheap, and they can put the buyer mind at ease fairly quickly. I’m a little surprised I haven’t seen those, they’re not that expensive for builders to do.

John Burns:

I’ve had a couple CEOs tell me they’re doing it. And I mean, they start first with trying to talk the buyer into doing it. I’ve been surprised, that I thought you could only rate log for like 30 or 60 days. But, I’ve been hearing 90 days, 120 even, even some 180s. They’re probably pretty expensive.

Dean Wehrli:

Yeah.

John Burns:

You’d probably have to lock in at 50 basis points higher than today, or something like that. Then you can always refi your way out of it, or buy your way out of it if rates fall.

Dean Wehrli:

Yeah, and ARMs right? Adjustables are popping up. And that’s buyer discretion, buyers have chosen to do ARMs and get a much healthier rate for a 5/1 or a 7/1, or even a 10/1, they get a much better rate.

John Burns:

Well, let’s stick on that for one point. So, if you get an ARM today, let’s say it’s at three and a half, you have to qualify at a five. So, that’s the difference between this cycle and the last cycle, is that you don’t have to qualify at the three and a half, and then you knew your payment was going to grow, and you were dead unless good thing happened. Dodd-Frank prevented that this time, at least with qualifying mortgages. Now, there may be some non-banks that come in and start doing some stuff. But, so we’re watching that carefully, but I haven’t seen much of that.

Dean Wehrli:

That was actually my next question. Have we seen any kind of the nutty mortgage vehicles we saw 15 plus years ago?

John Burns:

I’m not seeing it, but I also believe all these big, non-banks are getting killed right now because their refi business is done, and some lawyer somewhere is figuring out a way to do this. So, we’re keeping an eye on it, but I haven’t seen it yet.

Dean Wehrli:

But that’s a positive, to speak… I mean, the mortgage industry has been much more disciplined, whether by their own actions, or maybe forced to a little bit by regulation, they’ve been much more disciplined. That bodes very well for the housing market.

John Burns:

Absolutely.

Dean Wehrli:

Let’s talk about sales, same thing about sales, home sales. Where do you see home sales going next couple years, nationally?

John Burns:

I mean, we’ve got a small decline in new home sales. Depending on how you count things, we’re not really over-building the market. Some people look at all the homes under construction and say, “Oh, we’re over-building the market,” but most of those were already pre-sold. So, it feels a lot more like 2000, 2001 to me, where we were recovering from the S&L, savings and loan crisis 12 years earlier, building the right number of homes, there was a tech correction in the stock market just like we’re having right now. But man, we weren’t building too many homes, and we were fine. It feels the same way to me right now.

Dean Wehrli:

Yeah. How about, same question, kind of from a regional aspect? Or like you said, the South, the sun belt, is where most of the activity is. But is it a national sort of a ease back in sales, that’s kind of affecting everyone the same?

John Burns:

I mean, that’s why we do these hundred-page reports on… Or 70-page reports on more than 100 markets, Dean. They’re all different. I mean, if you had to generalize there’s a lot of migration going into Florida, and they can bring the supply to market there. So, I think we’re going to see supply ramp up a lot in Florida. Florida, as we sit here, has had 30% price depreciation in the last 12 months, though. 30%. I mean, that’s crazy, when the country’s only-

Dean Wehrli:

And that’s with at least one alligator in every pool, which I just don’t understand it., I’m sorry, just kidding Florida, I tease Florida quite often on this show. Sorry about that. Let’s talk about supply and demand, the big, big, big fundamentals. Things like jobs, and economics, and demographics as well. Let’s start with demand, then we’ll head over to supply. Demand at its core is job creation, isn’t it? I mean, that’s the key indicator you want to look at. But I want to ask you this, before we talk about what you see happening in the economy, let me just ask you a kind of a little bigger picture question. How much of your housing market forecast for the near and mid-term is based on economic considerations, as opposed to… Like jobs, incomes, et cetera, as opposed to more purely housing considerations? Like whatever, mortgage rate supply, et cetera.

John Burns:

I don’t think we’re really experts in job growth and mortgage rates, so we read everything we can from all the experts, and pretty much go with the consensus. Or when we think the consensus is a bit wrong, or a bit too conservative, which is what we’re doing right now, deviate a bit. And so, I call those our assumptions, you have to have some assumptions. And I know people bash forecasters because, well, they’ve just always going to be wrong. But, every CEO I know has some idea of where his or her business is heading. And, most people now think, and we do too, that the economy’s going to slow dramatically, the fed has said that is our goal, to slow the economy, to get inflation down. We’ve studied the past, and far more times than not that’s ended up in a recession.

People blame the fed for the recession, but the truth is, I mean, the fed has just got to get the economy to slow down, and inflation to slow down. And right now, they’ve got their work cut out for them, because people’s… Even though the stock market has corrected, the net worths are massive, the amount in people’s checking accounts this year, at the beginning of the year was four times… Or excuse me, three times the norm. So, people got all this money, we locked them in their houses, they want to go on vacation, they want to go do all these things, and they’ve still got the money, and the fed is trying to get them to slow it down. I mean, they’re going to have to really hit the brakes pretty hard for inflation to come back.

I think there’s a silver lining here on inflation though, is that there’s been so much over-ordering of goods, like, everybody’s just over-ordering everything, that we’re going to wake up probably some time next year… Actually it happened in lumber this month, it happened in appliances last month, where all of a sudden, “Hey, we got enough lumber. Hey, we got enough appliances,” prices will come back down. I think you could see prices come down pretty substantially a year or so from now, just because everybody’s already got everything they need. And I’m thinking more businesses when I say this than consumers, but consumers too.

Dean Wehrli:

You think it’ll take that long? Because I think I saw… Well, you just saw last week how Walmart had over-ordered effective target as well. Do you think it’ll take that long, though, for that to impact prices?

John Burns:

It’s a good question. Amazon too, they stopped their industrial warehouse expansion. You know, there’s still a lot of things that are short, so probably due to the COVID-related manufacturing issues, at the beginning of the year the absenteeism was out of control in pretty much every plant in the world. Maybe it’ll be this year, Dean. I mean, the fed would love to see that.

Dean Wehrli:

Yeah, exactly. I mean, it’s a win-win. Well, it’s kind of, I guess not always, a win-win-lose. But, for the most part it impacts the economy positively, because you can see the fed kind of back off some of this squeezing of inflation, and that would be good for most folks.

John Burns:

We know the interesting part of that is a third of CPI is rents, 20% of the PCE, which is the one… Or 17% is the one that the fed looks at, is rents. When the fed raises mortgage rates, they increase demand on the rental market, which pushes rents up. So, with the mortgage rate side of things here, I think they’re actually hurting their own inflation stats, in really trying to help renters. They’re not helping renters right now.

Dean Wehrli:

It’s such a incredibly difficult dance. Whatever lever they push, it hits three other levers. Good luck to them.

Dean Wehrli:

That’s a tough gig, man.

John Burns:

Yes.

Dean Wehrli:

Let’s talk about supply. Supply is, I guess outside of some developed markets, supply has been fairly tame nationally, I think, especially in some coastal markets for sure. Could this sort of somewhat constrained supply be kind of a saving grace as the market transitions?

John Burns:

I think it totally is. I mean, it completely is. And the one thing that we’ve been talking about this entire recovery is, when is the money going to flow into land development? And it really hasn’t. I mean, land development is risky, as you know. But the cost increases on land developers has been worse than on home builders, is my understanding. And so, there’s not a lot of money coming in to land development, and you’re not going to get a lot of houses without the land developed. So, there’s a few companies that have leaned in hard to that, and are growing their land development portfolio. But I’m willing to say there’s half as many land developers out there as probably in the last cycle, Dean.

Dean Wehrli:

Mm-hmm, yeah. Well, some didn’t make it through it, and never came back, right? And otherwise, land has been even more scarce, and as you mentioned, more expensive. It takes a pretty big outfit to do land development these days. Are you still seeing, though, a pretty strong appetite for land from the builder community?

John Burns:

Well, our feasibility business is booming, and I think you’ve worked every weekend for the last three years. I think you know the answer to that question, Dean.

Dean Wehrli:

Sometimes you just have to ask it, yeah, yeah. Nationally though, have you seen any cracks or signs at all that some builders are pulling back?

John Burns:

I’ve been expecting some, and we haven’t seen it yet. I mean, our business is still booming. I think we’re going to be an early indicator there. You know, what has happened, the land development is now coming from the publicly-traded home builders, who are doing it in conjunction with land bankers, who are a different bucket of capital, that looking for some higher yields with some protection. So, there’s a number of land bankers out there that I think are… They’re still moving forward, and they’re still buying land, but they’re doing it under an option agreement in case things get really tough, and structuring it for the land banker who’s getting a good risk-reward the way they look at things.

Dean Wehrli:

Let’s jump to that, I was going to ask about that later, let’s do it now. Besides land banking, are there other strategies that builders are going to use to sort of mitigate market changes? And you can include land banking, if you wanted to do that as well.

John Burns:

I mean, the biggest one, it’s like they’re prepared for a huge slowdown that isn’t even here. So, they took advantage of the really low interest rates the last five years, and went to the bond market. And this includes some private builders that are quite large, they did it too, went to the bond market. One of them borrowed a 30-year bond, so the principal’s not due for 30 years at very low interest rates. In fact I just looked at this, I think the builders have… The top seven builders have 12 billion in cash, and 25 billion in debt, but less than half of that debt is due in the next five or six years. So I mean, they’re going to be able to build through this, frankly, no matter what.

Dean Wehrli:

Yeah, that’s pretty safe right? You can build into the next cycle almost certainly, you know what I mean? You can move into the next cycle in that five or six-year span, in all likelihood.

John Burns:

Yeah, well you asked about alternatives to land banking. What you don’t want to have is some sort of debt problem where you need to re-negotiate with your lenders, or too much land, far more than you need, and you can’t monetize it. The builders have structured their balance sheet to be protected for both.

Dean Wehrli:

Let’s circle back to those kind of fundamentals, I want to talk about demographics, one of your favorite topics for sure. Millennials are, that generation is sort of in, or at least near their prime move up years right now. Gen Z is still entering its rental years, but it’s not too far off from the entry level years, and that’s I believe, tell me if I’m wrong, the biggest generational bucket ever, I believe, Gen Z, isn’t it? I read that somewhere, that it’s the biggest generation ever.

John Burns:

I don’t know if you read our book, but we broke it down by decade born with different names.

John Burns:

So, the largest cohort out there was born I think from ’89 to ’93, that’s the five-year cohort. So, no, they’re 30. So, that’s an older first-time buyer, certainly not a typical household formation period. The group that’s younger than them is smaller, Dean. But, it usually gets filled in with immigration, because people tend to come here in their ’20s, and immigration has been low the last couple years, obviously. So, there’s a dearth coming in behind that of traditional renters right now.

Dean Wehrli:

Yeah, yeah, the immigration question is something that’s going to have to be addressed here as we reach hopefully the final, final end of COVID. We’ll see what happens though, politically I know that’s a powder keg. But certainly, we’ve had extremely depressed immigration rates here over the last couple years.

John Burns:

Yeah, no, I agree with that, Dean.

Dean Wehrli:

There has been some pretty decent financial recovery though, hasn’t there, for the younger cohort? They’ve caught up. That’s a big thesis in the Big Shifts book, is that some generations, some cohorts just have it a little worse economically, financially, income-wise. But, there’s been a lot of catch up here these last two years.

John Burns:

They’ve caught up, and I think they’re probably ahead of every generation before them. Particularly if they got into crypto a little early.

Dean Wehrli:

And got out.

John Burns:

Well, and got out, then they’re golden. But I don’t think a lot of them did, because they had to pay taxes. You know, crypto has crashed slightly, but the last time I looked it’s still up significantly from three years ago. So, depending on when you got in, you’re still doing all right.

Dean Wehrli:

Okay. I just hate the crypto commercials, so I’m biased. Is it too early to worry about Gen Alpha, I think they’re born since 2010? And you always have a picture of every generation, every 10-year cohort you have a picture of a representative. Can I nominate Steph Curry’s daughter Riley for Gen Alpha? Just throwing it out there.

John Burns:

Sure, sure. You know, it’s too early to think about that. But when we did this research, in your early teens kind of what happened in the world impacted you pretty dramatically, your spending patterns and everything else. And that’s the group that spent two years in school with masks on. So you know, I kind of wonder what COVID… One of the things COVID did for our industry is it created more importance on having a good-quality house, either whether you’re renting or owning. I mean, we saw that for sure. I wonder if that generation will value their house a lot more than prior generations because of this.

Dean Wehrli:

Maybe. Or value school a lot more, because my understanding is that test scores and things like that have taken a hit from distant learning. It hasn’t worked out all that well. Let’s talk about some nuances, let’s talk about… We mentioned strategies and land banking here. How about, what is the attitude for money from the financial sector, from the investor class in the housing market? Are the major investors pulling back, staying the same, still pretty positive?

John Burns:

One of the more interesting things that happened at the conference we had earlier this month is we had two CEOs of publicly-traded home builders whose stock was trading at less than five times their net income. And the panel before that was a bunch of unicorns who had been valued at more than 20 times’ revenue. So you can see investors are like, which one… So, the stock market clearly doesn’t think very much about the home builders at all. In fact, all the home builders have said, “We’re buying back our stock in droves, because we don’t know why it doesn’t understand us.” At the same time, a lot of money that’s been investing in prop tech to disrupt our industry, or improve our industry, has pulled back dramatically.

                But from some insane highs, and then the third sector of capital is really all the money that’s been pouring into build for rent. And I think it’s a stronger thesis right now than ever, because they’re telling me, “Well, it’s an inflation hedge, and I’m worried about inflation.” Mortgage rates are up, which is going to increase rental demand. And yes, my cost of borrowing has gone up, so I need to pay a higher cap rate. So, it’s not all a perfect story. But all the money that’s out there, allocated to US real estate, is looking at rental housing in America as by far the number one option versus retail, versus office, versus hotel, versus for sale housing. So, it’s different buckets of capital behaving pretty differently right now.

Dean Wehrli:

And I think we also have to be careful about how we measure things. Coming off ahistorically high years, and you’re going to start seeing year over year changes that are kind of misleading, often. I worry about that sometimes, that the wrong message is going to be sent from somebody’s… Because you’re measuring a denominator that’s just extraordinary.

John Burns:

You know, we just had that in our builder survey. I think on average last month they sold 3.1 per community, which is phenomenal. Last year I think it was 3.7. So like, “Oh no, sales are down.”

Dean Wehrli:

It’s down a lot percent, yeah.

John Burns:

3.1!? That’s awesome.

Dean Wehrli:

I know, you would have been very happy with that, which is my next question. I won’t say any names obviously, but some investors, have investors been a little bit spoiled maybe with a return the last couple of years that’s again, not historically the norm, and maybe will do or not do a deal based on the expectation of returns, returns that are long-term were pretty extraordinary returns. Does that make sense?

John Burns:

Which type of investors are you talking about?

Dean Wehrli:

I’ve got to be careful. The one I most recently heard literally that argument was a land banker.

John Burns:

Okay. Well, you know, land bankers are getting 9 or 10 percent unlevered yield, and we’re in a 3% treasury environment right now. And no, actually land bankers do not participate very much in the upside. So, it was actually there are clients who’ve been doing really well. So, it’s tough to answer. The investors I think who are going to get hurt are the unprofessional investors. In fact we’ve got a fix and flip survey and one of the answers stunned me, is that when we last did the survey, which was in the first quarter, it was less than 50%, I want to say something like 46% of flippers were selling the home for more than they had planned on selling it. I was like, “Home prices are up 19%, this should be 99% of you.”

So, if not even half of them are doing better than they thought when the market has been phenomenal, and I’m talking about just the revenue side, not the cost side. I know they’ve had some cost challenges. What’s going to happen to them this year if home prices don’t go up very much, and they still have the cost overruns? So, I think it’s those… Everybody who just thought they were the next Chip and Joanna is the one who’s going to get hurt.

Dean Wehrli:

What’s happening with investors right now? That’s a good little segue. Are they starting to shy away, because they feel like maybe they’re not going to make their nut?

John Burns:

Well, you know for the small-time investor, the king that they all listen to is the guy who wrote Rich Dad, Poor Dad, and he told them last fall to stop. So, I’m not sure how many of them have actually stopped. And then some of our professional clients that are more apartment people who underwrite each deal carefully have said they were being more cautious, and they’ve hit pause. But there’s a group of folks who have already raised a massive fund to be deployed in real estate for somebody, and the person they raised it from is still telling them, “Please deploy it.” So, there’s still quite a bit of capital out there.

Dean Wehrli:

Yeah. I mean, for those folks who went to the free seminar and bought the VHS tape, I can’t help you, no-one can. But, they could have an actual impact on the market, surprisingly enough. So, the investor buyer is something… Because investors have always been a bigger part of the market than people realize. They’re up now, but it’s not like… The baseline is still pretty strong, still…

John Burns:

I know, and you know The New York Times, and Bloomberg, and everyone else won’t one article about the small-time investor. But, I think the last time we ran the math, a third of the homes in the country were being sold to investors, which we include to be anyone who’s sending the property tax bill to a different address. 6% are going to investors who own 10 or more homes, which is up from a couple of years ago of 2%. But, it’s the small mom and pop… If you go to Biggerpockets.com, and I think they have a couple million people registered there, their podcast listens are huge, and they’re targeted to people who are just going to do their first flip. That adds up to a really, really big number.

Dean Wehrli:

Exactly. There’s such a misperception about how much the big institutional buyers have, the share in the market is so much smaller than the perception is.

John Burns:

Yeah, sort of-

Dean Wehrli:

How about cost trends, supply chain kind of stuff? Do you see any real relaxation there, some relief on the horizon?

John Burns:

Well, I mentioned we’ve seen it… As of today, lumber quite a bit, but lumber’s gone up or down two or three times in the last two years. We’ve seen it in appliances, we’re definitely not seeing it in windows and doors yet, we’re definitely not seeing it in garage doors, and fuse boxes, and a lot of things that… Our building products team did this amazing chart that blew my mind, by product type of how many different companies and materials touched something before it came to market. It blew my mind, and it only takes one company to have a supply chain issue somewhere where you don’t get your chip, or you don’t get your window, you know?

Dean Wehrli:

Mm-hmm.

John Burns:

It could be the resin in the window, it could be the glass manufacturer who’s got absenteeism problems. It’s been crazy, but unless we… Hopefully we don’t have any more outbreaks here, and I think supply is going to catch up at some point, and we’ll get back to normal here, Dean.

Dean Wehrli:

Yeah, we have heard so much of that. It’s like, “No, we’re ready to go, we had to wait six weeks for the faucets and that was it, everything else was good to go.” That home couldn’t be sold, closed because of the faucets, whatever.

John Burns:

Yeah, they’re still lockdown in many cities in China right now.

Dean Wehrli:

Yeah, yeah, so that… Yeah, when that eases… So, it’s going to take a while, that’s something that’s definitely going to take some time to work back to normal. How about the government? What kind of responses in the toolkit of the government, I guess financially or in terms of policy, if the market really does slow down what can the government do to smooth things over?

John Burns:

Boy, I’m not a policy guy. You know, I’ve been stunned by how much they have done. I mean, when we had the Great Financial Crisis, whoever thought they’d actually pass a tax credit to get home sales going again, and when we got COVID, who actually thought the IRS and the Small Business Administration, two of the most notorious bureaucratic organizations on the planet, would completely distribute as much money as they did? So, I think there’s a belief that if something bad happens again, everybody’s going to turn to the government and say, “Well, what are you going to do to bail us out now?” Which is actually… There probably is some truth to that, but it is a little bit scary that people are relying on that backdrop.

Dean Wehrli:

I think it’s almost certainly that’s the attitude, and there is a lot of things they can do with respect to Fanny & Freddy, and things like that. They have shown themselves to be pretty darn aggressive to protect the housing market, it’s a huge part of the economy. Interest rates though, they can’t do much with that with inflation like it is. There’s not much, they couldn’t lower the… The classic lowering of interest rates, that’s some time off for sure.

John Burns:

Well, if it made inflation worse they wouldn’t want to do that, that’s right.

Dean Wehrli:

Exactly, yeah. Just briefly, we talked about a minute ago, what’s your take on the rental market? You kind of presaged that a second ago.

John Burns:

You know, we’re pretty bullish on the rental market. So, we’ve got a view that the odds are probably higher than not we have a recession next year, which will not be good. But, the single family rental market is not getting overbuilt, despite all the money that’s coming in. We think rents are going to keep growing, and I think the apartment market, depending on the location, could be a bit at risk. Because, we are building more apartments than ever before right now, and you don’t want to dump 400,000 apartments, empty units into a market in recession. So, we’re a little more cautious on apartments. But again, going back to the whole demand/supply thing, our number is we’re under-supplied as a country by 1.7 million units.

I know there’s some people that say five or more, but it doesn’t matter. That’s a lot of under-supply, and in the southern part of the country I think it’s more significant than that per market. You know, all of that adds up to maybe some softening during a recession, but nothing bad. The thing I worry about, and I think the fed is worried about too, and people are criticizing them for not moving more quickly. But rising rates in the past have caused a problem for the Michael Milken era with the private equity, and Orange County filing bankruptcy in 1994, and we had an AIG bailout, and a Lehman Brothers bailout. And I think the fed’s been telegraphing these interest rate hikes to try to see what’s under the hood there, and are we going to have anything bad?

And they haven’t seen anything yet, but I think the odds are pretty good there’s something, Dean. You don’t go see a 250 basis point increase in interest rates and have no industry makeup through that with no problems.

Dean Wehrli:

Let me ask you two more questions. One is psychology, I know you’re not a psychologist, but pretend you are. You’ve seen them on TV. Do you think there’s a potential here for kind of a lessons learned psychology to actually impact the market? What I mean by that is, a lot of folks… Buyers I mean, what’s their last memory? Their most recent memory was, if they’re old enough anyway, was 2008. And you’re starting to hear, I’ve heard it very, very anecdotally, of that, “Oh, hey, last time this happened the market tanked. I’m going to wait for the prices to go down 50% before I buy anything.” You see that having any traction?

John Burns:

Well, if you were an adult in 2008, you probably already own. I mean, the home ownership rate in that cohort is north of 70%, I think. I think those people are going to say, “Hey, I’m so lucky, I’ve got a 3% mortgage rate on my current house. I’m fine, I’m just not going to be able to move, or get a nicer house.” And then the group that is younger than that, I think they’re the ones that are going through this the first time, and that’s always been the lesson that’s learned Dean, in our 20s is when we learn our lessons.

Dean Wehrli:

Yeah, that’s true. That’s probably the thing that saves that, but I have heard that it is younger buyers, by the way, that I’m referring to, those anecdotes are younger potential buyers. They didn’t live through it, but they’re hearing about it. So it’s like, “Oh, I’ll play this market,” kind of a thing. So, I don’t know, we’ll see.

John Burns:

Well, it’s the first they’re seeing stock market decline. So, discovering a lot of things.

Dean Wehrli:

And they are freaking out. So, let me end with metrics. I know we cover a ton of metrics in our research, and even the critical metrics are very, very numerous, there’s a ton of them. But, I’m not going to let you weasel out and say, “Hey, all 109.” I’m going to ask you, what are the one or two or so just critical metrics that you’re going to be watching here to see and get a sense of where the market is heading?

John Burns:

 Months of supply. So, months of supply, and there’s going to be some negative headlines here but don’t overreact. So, the number of homes on the market has to triple just to get back to where it was in 2019. Think about that for a minute, 2019 was a strong market. But if it goes past that, then I’d be concerned. That’s the demand/supply balance that moves prices the most, the other one as you know, we already talked about it, is job growth. There are two surveys that are very good, the right answer is usually somewhere between the two surveys. But as long as we see job growth positive, and as long as the months of supply doesn’t significantly more than triple, or I should say the total number of supply homes on the market, things will be fine.

Dean Wehrli:

It’s funny, month supply is a critical indicator, and we are seeing that go up. But, it’s up for like .4 to .8 kind of a thing, in most markets.

John Burns:

Right, right. And people can make a really negative headline out of that, so just be careful.

Dean Wehrli:

It doubled, it doubled, yeah.

John Burns:

Be careful not to overreact to that, is what I’m saying.

Dean Wehrli:

Okay, yeah, it’s another one of those. Okay, that’s awesome, John. Thank you. This has been, as always, very educational and enlightening, I appreciate it.

John Burns:

All right, thanks Dean. You do a great job on this podcast, it’s great for our company. I appreciate it.

Dean Wehrli:

Thank you. This has been the New Home Insights Podcast, I’m your host Dean Wehrli, we’ve had John Burns with us. We’ll see you in a couple weeks.

 


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