The Federal Reserve has hiked rates rapidly over the last 18 months, and yet inflation remains surprisingly high. Perhaps what’s most surprising is that even in the most rate sensitive area of the economy -- housing -- the surge in mortgage rates hasn’t had a significant cooling effect. Prices have barely budged and even the homebuilders have been booming again after a brief dip in late 2022. So what is happening now? Why did the rate shock fail to derail the industry? And what is the lesson that homebuilders have taken away from this cycle? On this episode, we speak with Zonda chief economist Ali Wolf about why and how the housing market is still broken despite this rate action. This transcript has been lightly edited for clarity.
Key insights from the pod:
Why are house prices going up again? — 3:28
Homebuilders versus resales — 4:58
The scars of the 2008 housing bust — 10:46
House prices going down in some Sunbelt cities — 12:41
Why the homebuilders survey’s still negative — 20:59
More land purchase activity — 23:17
Public versus private homebuilders — 28:09
The role of baby boomers in the market — 30:05
Impact of banking crisis and credit availability — 33:51
A shortage of transformers — 37:42
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Joe Weisenthal: (00:10)
Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
Tracy: (00:15)
And I'm Tracy Alloway.
Joe: (00:16)
Tracy. Housing, I feel like we'll never get away [from it]. I mean, we'll never get away from this topic ever. It doesn't matter. Boom bust. We're going to be talking about this forever.
Tracy: (00:26)
Well, I mean everyone lives somewhere, right? You're either in an apartment, probably hoping one day to own a house, or you're already in a house and you're very, very conscious of whatever is happening to the price of your most important financial asset. So I feel like this is on everyone's minds. Obviously there's been a lot of talk about it because rates have gone up so much. And at the same time, I think we wrote about this late last year, it's been a really weird housing market in many ways.
Joe: (00:53)
And you know, we had that conversation of course with James Egan of Morgan Stanley and at the time he sort of made the bold prediction and he said even with the mortgage rate shock, I don't think prices are going to come down. And I think that's been pretty validated. The one thing that did come down in a meaningful way was housing starts and home builder activity. And you see all the lines sharply moving lower at the end, you know, throughout basically the second half of 2022. And yet here we are in, you know, spring 2023, home builder stocks are basically back near the tops and housing starts picked up again. And it's not like rates have really come down. So even the one category that was affected by rates was not affected by rates.
Tracy: (01:35)
Well, it's sort of a great microcosm of the soft versus hard data debate, which is the hard data is still coming in relatively active and strong, but the soft data is quite weak at the moment. And you see that in the home builders as well. So there's activity, but if you look at, for instance, the confidence survey of home builders, that's gone down quite a bit, although it is starting to pick up again.
Joe: (01:57)
No, it is. And you know, I was reading through D.R. Horton's recent earnings report and they're expressing some optimism. They said some of the supply chain issues are behind us, but still [there’s this] sort of deep structural under-housing. And I have two questions sort of related to this that I'm thinking about, still the problems of like the post great financial crisis period. And we talk [about], there's a big Odd Lots theme [about] how much did that scar the home builders, right?
And then this sort of like mini-homebuilder recession that we got the second in the second half of 2022, is that like that all over again where the home builders are like, “well you just pulled the rug out from us once again.” And if the whole point of rate hikes, it's like ease supply, and Jerome Powell specifically talked about that as like one of the goals, have we accomplished anything from these raid hikes so far?
Tracy: (02:47)
Definitely a lot to talk about.
Joe: (02:48)
All right. Well I'm very excited about today's guest, the perfect guest. We've had her on before, we talked to her about the home builders during the absolute peak of the mania. And here we are again with Ali Wolf, the chief economist at Zonda. So Ali, thank you so much for coming back on Odd Lots.
Ali Wolf: (03:05)
Hi Joe. Hi Tracy. Thanks for having me.
Joe: (03:07)
Absolutely. Thank you so much for coming back. So how is this that we had this huge rate shock, like one of the fastest hiking cycles ever, and we couldn't even slow down the new construction market? It's picking back up again. Home building stocks shooting up, we had what? A three-month housing recession out of it?
Ali: (03:28)
Yeah, so I think the important thing is to go back to the beginning of last year. So we had rates in the threes and almost overnight it felt like rates went to the sixes. And there was just this huge fear that okay, no one's going to want to buy anymore when in fact we actually saw sales continue to be strong once rates got to six.
And there was this big question mark, this is kind of spring selling season last year, how is this happening? This is kind of defies logic. This defies what's happened to the monthly payment change. And it was because there were a lot of people that were saying, “oh gosh, if they've already gone up, are they going to continue to go more? I don't want to miss my opportunity to buy a home.”
That spurred some activity until about the middle of last year. And then you saw exactly what you thought would happen, which is consumers were like, “whoa, nevermind. Housing's expensive. There may be a recession, I may lose my job, I don't want to buy a home.” So demand froze up until we start to see the supply, or the sellers adjust. And I think that's a really big part of what happened last year and how that's evolved this year.
Tracy: (04:35)
Well, talk to us about the sellers then, because I remember this was a big component of Jim Egan's argument at Morgan Stanley as well. This idea that with rates this high you just don't, why would you sell your house? It's going to be harder to get a mortgage at a low rate and there's a possibility that you're selling your house maybe for less than what you bought it at. So what are sellers doing in this environment?
Ali: (04:58)
Well, so last year we did see a little bit of an uptick towards the end of the year of resale supply. But it, I think it was a lot of the sellers thinking, “oh shoot, if I don't sell now, I don't want to sell for less.” So that drove a little bit of an increase on the resale supply. But the real story came from the home builders.
So home builders, as we talked about last time we met, were dealing with the issue of not being able to get homes built quickly. They didn't know how much it would cost them to get those homes built. So then they started to build spec homes. Spec homes, going back to scars of last cycle, a lot of builders weren't going spec heavy, meaning building a home without a buyer attached because last cycle when you build a home without a buyer, those became the most risky because the music stopped and then you had a whole bunch of standing inventory and what were you going to do with those homes?
This time around builders started to do specs because they said “I can control for how expensive it is to get this home built and I don't have a customer who's mad that it took 14 months to get this home built instead of eight.” So they built these homes and all of these homes hit the market at the end of last year at just about the same time that demand fell off a cliff and that's where you started to see and hear about fire sales that happened from the builder side. So they were really the sellers, Tracy, to your question, they were the sellers that were influencing the market the most at the end of last year.
Tracy: (06:23)
So the sort of like marginal supplier of houses, I guess?
Ali: (06:28)
That's exactly it. So they had standing inventory and they said “we don't want this” and if consumers don't want it at this price, what are they willing to buy this home for?
Joe: (06:37)
Okay, but what now because now we're back here in spring of 2023 and I assume, it feels like that fire sale is over and we see housing starts picking up again. So was that like a one-time shock where we had this like brief supply of, I don't know, introduction of new supply onto the market and now we're just back into tightness again?
Ali: (06:57)
Yep. So what happened is inventory buildup, builders offered those discounts, builders offered incentives, consumers showed up, the inventory rolled over. So if you look at the chart, you have this rapid increase and now you have inventory coming down at the same time that you have sales going back up because those homes are being sold through. You then also have builders that are raising prices again. So instead of lowering prices like last year, you have builders raising prices and because demand is stronger, that is contributing to more builders feeling more confident to start more homes.
Joe: (07:28)
But I get, and so here, and I sort of brought this up in the intro, which to me is the big question. It's like we did get this big rate shock, are we going to see scars of the last six months or the Fed's ongoing inclination, whatever it is, tamp down this economy? Will it contribute to some, okay, yes builders may be more confident than they were six months ago, but is there scars of it? Is there going to be a residual caution that once again sort of impairs the upward trajectory of new home supply?
Ali: (08:00)
So I was on a call with a builder yesterday and as we were talking. They were saying “a lot of this feels too good to be true, this feels like we shouldn't be having as much success as we are, but we're still going to go through with our land acquisition because as it stands right now, we think that there is a demand for more homes and we want to be backfilling that.” Now you have to have enough confidence to do that. You have to have an equity partner that's willing to support that and you also have to feel good. There was so much talk on that call about, “yeah we think we're going to go through with land acquisition but we also think a recession's probably around the corner and how are we trying to plan for a recession where maybe demand's down and then we're actually increasing starts at again the wrong time of the market.”
Tracy: (08:47)
What are you seeing in terms of product segmentation? Because I think this is one way that a lot of different companies deal with the future economic uncertainty is they sort of tailor their offering to maybe a level of person who is more price inelastic or less price sensitive. Is that what we're seeing in the housing market as well?
Ali: (09:09)
Yeah, and we should talk about the different buyers because they think that's where the story gets interesting. But probably the most important trend is if you think about work from home, there was this discussion a couple years ago that you just build a big a bigger home because people are going to move further out and they want more space. And so home size is going to go up and in fact if you look at what's happening with home size, it's not just about a certain buyer that's going to continue to purchase because in a lot of cases those were the buyers that were the most active over the past few years.
The biggest pool of buyers that have been untapped are those that haven't been able to purchase because of what's happened with home prices and because of how competitive the market was. So we're actually seeing that builders are reversing home size. So they're trying to make the home smaller to be able to account for the quantifiable demand pool that wants to purchase a home but just can't figure out how to make the math work.
Joe: (10:03)
This is really interesting to me and I do feel like in most of the housing discussions and probably including the ones that we've had, this is a dynamic that strikes me as under discussed, which is that in 2020 or 2021 a bunch of people maybe sort of woke up to the fact that “oh, maybe the future of work is going to be hybrid or I'm going to work from home. And so where I move I wanted to have space,” but regardless of the macro situation, I would sort of assume that's sort of like a one-time readjustment.
So it is the implication to some extent that the people who really feel they need work from home space, like that is done. They got their house, whether it's a rental or they bought it and at that point, that kink is out of the market?
Ali: (10:46)
If you look at sales, it backs that argument. So basically if you think back to again, last cycle there was the drive to you qualify. So builders were going further and further away from the central business district because of affordability. That proved to be a poor investment when the market slowed because those were some of the buyers that had to move that far out that got hit the hardest during the great financial crisis. And builders had the land that was out there and the homes that were out there at a price that people couldn't support. And those became kind of the ground zero for the price correction.
So going back to scars, builders then didn't want to go to those areas really from the great financial crisis up until 2020. And then what happened is 2020 hits and all of a sudden people say, “you know what, I don't care about living an hour from the central business district because that means an hour away, I'm going to get a 20% discount in price and a 30% bump in square footage.”
So that basically said to builders, go back to where you wouldn't touch before because that's where the demand is. Problem is it takes a long time for that lot to become available for a builder to go vertical on. And over that period of time, more people are returning to the office, more people are doing a hybrid schedule and that demand, that [was] thought to be this huge pull of buyers, has dwindled down. And so now when you think about the risk, again it goes back to the periphery, it goes back to the same location that was the highest risk last time too.
Tracy: (12:17)
Can you talk to us about how that's playing out, you know, if you widen the geographic net a little bit more, what we have seen over the past couple of years is this idea of people moving away from maybe the biggest cities in the US, moving out to the Sunbelt states, places like, I mean, Austin was a big one. Is that just played out at the moment? Or what are you seeing in those markets?
Ali: (12:41)
So when we look at the rate of migration, luckily census just put out their data recently where you can look through the middle of last year, you can see the higher rate of migration was happening the prior year. We're still seeing that there's some migration but it's trending down in terms of new people that are moving. You don't have, to Joe's point, that one time kind of rush of people.
There's still some people that are trickling out that are moving, that still have work from home and maybe they feel more comfortable with where the market is. But I think you also have to take those markets separately because there's been this big discussion of, okay, everyone's leaving big cities and so what this is doing is killing the Los Angeles housing market or the San Francisco housing market or the New York housing market when in reality those markets became so expensive because there wasn't enough building.
And even if you subtracted out however many people have left, they're still undersupplied. So it's a tricky environment. Where, then you go to the southeast, which has been that kind of top market for migration. Southeast doesn't have all of the infrastructure in place. So we're hearing traffic's getting more frustrating. Home prices in those areas relative themselves are going up. But they're also pipeline markets. They're markets that over time builders will likely be able to match demand with supply but it's going to take time to get there.
Joe: (14:17)
Now there are a few markets and in the aggregate we sort of know that basically prices really have held up nationally much better than maybe some people would've expected, etc. There are some markets that have seen price decreases. Is there a common thread … is it the ultra boom towns of the zoom towns of 2021? Is there a common thread of where it's like actually we kind of see a slowdown that's real?
Ali: (14:43)
I would say there's a couple to cut that, Joe and Tracy. I think this is the most interesting part of the housing market from my opinion, is there was a discussion that home prices can't go down if the unemployment is at record lows and if resale inventory is at record lows. When in reality there are markets that it's not an oversupply issue or a credit issue like last cycle, but it's a “fundamentals do not align” issue where we've found in some markets that home prices are so out of whack with incomes that sure there's a certain pool of buyers that have been able to buy homes and maybe will continue to buy homes. But if you are trying to cater to the Austin market, for example, not everyone is a transplant from San Francisco that can tap equity from California that has a high wage that can really -- going back to the price inelasticity -- they don't care what the home is priced. That's only a certain subset of the market.
So areas like Austin, salt Lake City, Denver, Phoenix, these were areas that” oh these are going to do fine because everyone wants to move there.” But because everyone wanted to move there, they started to hit that price ceiling. So part of it is the boom cities and then part of it is some of the coastal western cities that just inherently are more expensive, more interest rate sensitive despite having higher wealth individuals, they have a higher base price and they did see that the prices were already high going into the pandemic and now they've only gone higher.
Tracy: (16:17)
Wait, so this is really interesting because unemployment was supposed to be the sort of wild card in the housing market. As long as unemployment stays low, you won't get this wave of forced selling that has contributed to previous crashes -- notably the 2008 financial crisis and housing bust. But you are saying we have seen some price decreases even in markets where unemployment is still relatively low?
Ali: (16:43)
Yep, that's exactly it, because I think what people say is, well someone has to rent or own. But they have a third option. They can move in with friends, they can move in with family, they can move in with roommates. And we didn't see that during the pandemic. During the pandemic, everyone was leaving family and leaving friends and leaving roommates.
When inflation gets too high, when home prices get too high, people have a third option. And that third option is, I don't want to play in this market, I don't want to pay more the rent, I don't want to pay at today's home prices. And I think that that also contributed, you had enough people step back that even though supply’s low, the fourth quarter Really was the key component, supply was low, but demand got even lower for a while. That's again going back to Joe's point, that's changed this year because now the market's come back to life. But that's what we saw last year.
Joe: (17:32)
Yeah, I forgot about that. The sort of third element. We talked about the work from home, one time shock and then the household formation boom that we saw. As someone dealing with New York City housing right now, and I don't really want to talk about it, I would love a roommate. I want a room mate to move in…
Tracy: (17:48)
Joe, I'll move in with you. Honestly!
Joe: (17:51)
Oh you want to? Shall we split a house?
Tracy: (17:53)
This might solve both our problems.
Joe: (17:54)
We could set up a studio at home. Can we do that? Can we like split a house? So going back to these themes that I think were very prevalent the last time we talked, you know, I think if a year and a half ago we might have been talking about like windows and garage doors and certainly lumber prices and all that – labor. And there's some specific details I want to get into, but top line it does seem like, are those healed? Is the housing supply chain more or less healed at this point?
Ali: (18:24)
Let's give numbers. So supply chain issues, when we talked to builders for over a year, almost a hundred percent of them said supply chain was a massive issue for them. Our data as of April was that 35% of builders are saying it's a massive issue. So I don't want to say it's healed, I want to say it is so significantly better that the issues that we're dealing with today feel like child's pay compared to what we had before.
Joe: (18:54)
So just to follow up on this though, I mentioned, this morning I was like reading the D.R. Horton earnings call, they're like “yeah we really, you know, we're not really seeing many supply chain issues.” But could this be the kind of thing where it's like all these individual builders say yeah there our issues have gotten a lot better. But if there is this sort of sudden, you know, reacceleration suddenly they all start thinking that they have an availability of supply. Meanwhile that window company shut down for a while because of the slowdown at the end of 2022. Is there the risk that these issues actually come back in a meaningful way if this “too good to be true” market is sustained?
Ali: (19:31)
Absolutely. Yeah, no doubt. I think that's something that luckily though, it's not just you that's identified that as a potential risk. Builders have identified that as a potential risk. They're saying if we all decide to start, we know that our suppliers forecasted that this year was going to be down for overall starts. It probably does still end up down from overall starts. But if it's way faster…
That's what's been the weirdest thing about the market is it's whiplash, it's the market's going so fast and then the market slowed so dramatically and then the market's coming back again and then you're trying to plan production through all of these swings and that's hard for builders to get right. That's hard for land developers to get right. That's hard for suppliers to get right.
Joe: (20:12)
Tracy, listening to that like it just seems like…
Tracy: (20:15)
Classic bullwhip effect?
Joe: (20:15)
And also the opposite of what the Fed was hoping to achieve here. They're like let's just like bring some calm to this market…
Tracy: (20:21)
Well I definitely want to ask about long-term affordability trends and also credit availability because that's something that people are talking about in the wake of the banking crisis. But just before we do, in terms of how home builders are feeling about the outlook, can you maybe walk us through what exactly is happening with the survey? Because I think we have seen an improvement over the past three months, but if you look at the index, I think it's still at something like 44 for March, something like that. So still below 50 which would indicate it's still a somewhat negative outlook. So what exactly is happening in that survey measure?
Ali: (20:59)
Yep. So let's think about the demand side. So builders had the supply, they lowered prices, consumers returned. Now when we look at what's happening, we have 60% of builders that are raising prices again. And so this goes back to, Joe kind of if you think about the policymakers, this is probably the opposite that they want to see is that prices are going back up and that this is going to continue to stretch overall affordability.
Builders are seeing this idea that okay now we've lowered prices or now we've offered incentive, now consumers have returned. We still feel uncomfortable about the market because again going back to is there going to be an increase in the unemployment rate? Are we operating on a demand pool that is pent up from last year? And so because so many people didn't buy in the fourth quarter, they returned this year. Is this artificially high or is this something sustainable?
I think there's a lot of questions around that. So I don't think the confidence is fully back yet because part of the sales have been bought and part of the sale trajectory feels uncertain. What we know is at the end of last year, 75% of builders thought they were going to slow starts this year compared to last year, our data for April shows only 45% are planning to slow starts this year versus last year.
And think about it, I think this is an important thing. The reason builder slowed starts is because they were aligning starts with sales. If sales are down, starts are down. But that realignment works both directions. If sales are up, as long as the land's there, as long as labor's there, the material's there, starts should be up as well. So that's what we're seeing is this new realignment of starts coming back up to the fact that sales are stronger than expected.
Joe: (22:48)
Well you mentioned land there, which is a good segue to dive deeper into this. We did, I think back in March, an episode with Chase Emmerson and the Arizona market and he basically made this argument exactly which is like all these home builders walked away or wanted to walk away from deals or pause land acquisition and they're going to regret it because they're going to find as soon as house home building picks up again, they're going to be short and they're going to have to come back and pay more. So what are you seeing like on the land acquisition front right now?
Ali: (23:17)
So I think a really important difference between this cycle and past cycles too, as I remember when I joined the industry, there was just this common statement of land acquisition is a great role to be in but when the market slows, you're the first person cut. And that's the complete opposite of what we're seeing now.
We're actually finding that those land acquisition roles are still actually in very high demand because builders are thinking about not just the near term, but as I'm sure you and Chase, and I listened, it was a great podcast, you guys talked about it takes a long time to take land through horizontal development to get it ready for the builders to have access to. You need to be thinking way more long term than just what next month is going to look like or what the next six months is going to look like.
So we know right now from our builder survey at Zonda, 90% of builders feel that they have enough land for this year. 70% feel that they have enough land for next year. 25% think they have enough land for the following year. So what we're seeing is this mad grab of what's available, what can I buy – to Chase's point, there were a lot of builders that dropped a deal last year or changed their terms but let's focus on the drop. Drop a deal last year, went back to the land seller this year and said, “sorry, you know the market's a lot stronger than I thought it was. I want that that deal back.” And the seller says “great, but you gotta pay more money for it.”
So that's already happening. That's not even something that might happen. That's what's happening right now. But it's also causing a gap between who is able to pay that top dollar. That's not going to be every builder. That's going to be certain builders that have good access to capital and has a good long-term vision and believes that they should be investing to that point.
Tracy: (25:00)
So just on this note, how much of the activity that we're seeing, whether it's land acquisition or starts, how much of that comes down to the experience of the past few years where we did see, you know, timeframes for getting approvals and actually building things, getting the components that you need for a house extend? And I'm also thinking about something we saw in the labor market, which is this idea of labor hoarding, you know, companies acquiring more employees just in case it becomes more difficult in the future or there's some sort of disruption. Is that basically what we're seeing with the home builders now?
Ali: (25:36)
The labor hoarding? You have some of the builders say that specifically, we don't want to, going back to the whiplash, we don't want to be laying people off and then having to chase them back. We want to just try to provide steady employment if we can because we want to have, we know that there is a systemic undersupply in terms of the labor pool especially of people of a certain skillset. So yes, that's happening. And then in terms of when you look at the land side, I think there is such a fundamental belief that we need so many more homes built and you can't replace land especially in good locations. So you need to be absorbing whatever is available to get yourself in a good position in the future.
Tracy: (26:19)
So how much could that activity be sort of obscuring real demand at the moment I guess is the big question.
Ali: (26:28)
In terms of build or demand for land is your question?
Tracy: (26:32)
Yeah. Or both demand for land and also just construction in order to get it out of the way in advance of any potential disruptions coming down the pipeline.
Ali: (26:42)
Yeah, I think there's a lot of indicators in the housing market from builders buying land from consumers buying homes that's looking artificial given the dynamics. So in the land side, because at least over the past couple of years there hasn't been enough demand or hasn't been enough land, there's been such a rush with that demand.
I think that evolves because what we're seeing, and I mentioned this to Joe before this call, we're finding in some markets because it takes two to four years for land to go through the horizontal development side, we're now finally seeing that there is some more land available after three years of it being so incredibly tight. Now we don't think we've solved the land and lot issue but as starts activities down, even if it's going back up, it's down year over year and that's contributing to an increase in overall land and lot availability right now.
Joe: (27:40)
You know, speaking of home builder activity, I'm always fascinated by any industry in which you have a significant number of public players versus privately owned players and the different signals that they get from investors. And maybe public investors are rewarding one thing and the private investors could maybe think on different timeframes. What are we seeing with, in respect to that, on any category, whether it's new construction, whether it's land acquisition, are we seeing any different types of behaviors, public versus private players?
Ali: (28:09)
Crazy difference. So what we're seeing right now is if you look at of total transactions, public versus private share, publics are now almost at 50% of overall market share, where they were at about 35% going into the pandemic. They were at 25% during the great financial crisis. So public-private share absolutely skewing towards the publics in a lot of cases because they had better economies of scale, they had better margins when the market slowed, they ripped the bandaid off, they lowered prices way quicker and they helped to stimulate some of that sales activity.
They also generally have better access to labor. Generally will get the phone call first from the landside so they have a longer lead time and they have better access to land. It's really just allowing the public builders to get bigger and the private builders are having a lot harder of a time being competitive in today's market.
Tracy: (29:25)
You know, I mentioned unemployment as a sort of wild card for the market and there's another one that people talk a lot about and that's what the baby boomers actually do with their own houses as they age and start to die. Are we seeing any evidence of that sort of generational transfer of home ownership actually happened?
Because I feel like this is something that people have talked about as a possibility for many, many years and it has yet to really materialize. We are seeing some people maybe downsize, but we're also seeing a lot of baby boomers take advantage of the low rates of 2020 and 2021 to maybe buy a second home for income and things like that.
Ali: (30:05)
Tracy, this question is spot on. This is really the kind of the boomers hold the cards for what happens I think in terms of the resale supply. So what we understand is, and I can't remember if it's 83% or 86%, but AARP did a survey of boomers and said, “what do you want to do?” And either 83% or 86% of them said “I want to stay in place.”
So their intention is I don't want to move. If they downsize, depending on what rate they got and depending on if they still have a mortgage, they may not have any kind of affordability shock. They're not exhibiting the same kind of sticker shock that a normal buyer would. In fact, we know from the census data, 43% of people own their home free and clear. And that's skewed towards those 55-plus. So you have a lot of boomers that own their home free and clear they are happy because maybe their family's close by, they're happy because their doctors are close by, they know where their pharmacy is, they know where their grocery store is, they're perfectly content where they are.
With that being said, the National Association of Realtors put out their survey for 2022. They found that boomers are now the number one buyer and boomers are the number one seller. This group is actually more active than I think we believe them to be. Because there are a lot that are staying put. When you think about why boomers are moving United Van Lines says the third biggest reason people move is retirement. Boomers right now, all of them will be of retirement age by 2030.
So if they're not already moving now or changing their lifestyle now that's likely going to happen over the next handful of years. And then when you look at this too, we at Zonda created a Baby Chaser index. It's not just retirement but it's, if your children were living, oh let's just use California as an example. You and your children live in California, they moved to the southeast because it's more affordable, they now have grandbabies. Oftentimes we find 25% of boomers say they move to be close to their grandbabies. So there's also, if millennials move and migrate, that plays into boomers.
Joe: (32:10)
So rather than boomers being this net marginal supply that sort of eases the market, boomers are maybe de facto be competing with millennials because those retirement destinations, those baby chaser moves -- which is a great term, I hadn't heard it before -- they're essentially going to be going into the hot markets, perhaps not really solving any housing supply problems, perhaps worsening them.
Ali: (32:34)
We've seen that actually for years too, Joe, is that they're looking to downsize. So they're looking for a smaller square footage, entry level buyers are looking for smaller square footage because they're trying to adjust for price. But then you have an all cash boomer or a millennial with 3% down and there's one group that wins out over the other.
Tracy: (32:51)
So one of the things I wanted to ask you about as well is, you know, if you think about what moves the housing market, you have supply and demand and we've been talking about that, but you also have credit availability and affordability metrics and those tend to be the two things that do actually move quite quickly.
You know, you can get long running structural changes in supply and demand, but credit and affordability do kind of turn on a dime. So what are we seeing in terms of those two metrics? And especially in the wake of the, you know, banking drama of March where we did see some banks start to report that they were tightening lending standards?
Ali: (33:31)
Yep. So let's address the credit standards first because affordability is a very wide discussion at this point. But when we look at credit availability, builders are feeling more optimistic that they want to start more homes. I shared the stat, more builders think that starts will be flat or up this year than down.
A third of the builders we're talking to though, were saying, but buyers may be demanding more inventory. We may be wanting to build more homes. We may have now the supplies, the land, the labor to build it. We may not now have the credit component. So it's not going to apply. This goes back to Joe's question of public versus private. It doesn't apply to all builders equally, but we were just at an event in Seattle and we had some capital partners say, in some cases some capital partners are winning out because other banks or other lenders are seizing up.
And so they're trying to gain market share during that time. But you're hearing it in real time that there's a pullback in overall construction financing. And I wouldn't say I know enough about this to go into detail, but we're also hearing from a consumer borrower point of view that there's a little bit of tightening on jumbo loan access. And jumbo loans are obviously those for the higher price point and usually higher buyers and seeing that come down a little bit. And that's been a key driver of housing activity recently as well.
Joe: (34:53)
It does also speak to this question of, well how effective is interest rate policy at solving any of these problems? If one effect of it is just going to be at least some category of home builders, even if they have everything else in place, feel that they do not have the financing in place to continue to expand operations.
Ali: (35:10)
Yeah. And in a way, and I know it sounds counterintuitive because we want to get more homes built, but because land development takes so much time, not having as much start activity does allow the market to catch up a little bit. We were at a point where the suppliers couldn't keep up, the land developers couldn't keep up. And if you can get those land developers to keep moving forward, having more land inventory over time will be good to let us come out of this. But it's tricky because now you're having financing seize up to get new homes built, but you're also having builders raise prices again. So the market is operating completely out of whack where you should be seeing demand come down and prices come down, but now you're seeing prices up, but inventory potentially going down.
Tracy: (35:59)
Well, on that note, talk to us about the affordability aspect of it because it feel like we're still further away than ever to building a sort of sustainable market where people are able to get a foothold.
Ali: (36:13)
Yeah. This is going to be the hardest issue to solve because even if we're saying land availability is a little bit better, land prices are still expensive, we're saying labor availability is better, it's still expensive. We're saying supply chain is better. Okay, good. So now you can get the windows, but the windows are still 20% more expensive than they were going into the pandemic.
You're looking at government regulation. That's actually the number one issue that builders are saying right now that's impacting their ability to get more homes built and to be able to do it quickly. Time is money when it comes to home building. And again, going back to Seattle, it should take three months to get a permit issued from the local government. In Seattle, it's taking eight months. In Florida it's taking five months. So that's stretching out that too. So this is great that all of these problems are not getting worse, but if you look at where they are in terms of cost, they're still high. Which is making it hard for builders to be able to bring a home to the market at a reasonable price point.
Joe: (37:12)
I’m glad you brought that up because I meant to ask about that. I remember one of the bottlenecks and there were a few stories where it's like these government offices in these places are just completely overwhelmed by like the literal paperwork aspect of it. There's always so many public sector employees and we know that home builders have had a hard time like hiring, but also the public continues to be in short supply of labor. But that's still a constraint even after all this time? That the sort of permitting authorities, the paperwork authorities are still overworked?
Ali: (37:42)
Yeah. It's slow processing time and it applies to permits, it applies to inspections, but it also applies to the land and lot development. I do want to say one thing though because as we think about the constraints, so yes, a huge component is the regulatory component that's slowing down the ability to get more homes built quickly. But another thing when you talk about supply chain, yes the cycle times are generally within reason of where they were going into the pandemic.
But transformers are still a massive issue. Transformers are holding up the horizontal development to get land ready and then builders are saying that they've started a home and then they can't get electricity to the home and then they have to pause on that too. So I wouldn't say everything solved. Kind of the flavor of the week right now is transformers in the role it's playing in the market.
Tracy: (38:30)
This was why I asked that question about stretch timeframes. And whether or not that's sort of obscuring a lot of the real demand. But Ali, maybe one more question from me, but what are you looking at in terms of the catalyst for the rest of the year and something that could change the way the market has so far been functioning, which is, you know, in terms of at least house prices and activity, we have seen it be relatively resilient.
Ali: (38:58)
Yeah. I think we're tracking, what we know is consumer confidence can change instantly. So we're tracking what happens with consumer confidence. And it’s something where it literally can be weekend to weekend or day by day a builder will say, “oh, this article came out, the consumers read it and they said, you know what? I feel weird about the market.” So I think there's still headline risk. I think there's still economic risk. I think there's still mortgage rate risk as to how the market goes.
We didn't talk about investors who are not as active today, but if there's any kind of financial distress to investors or flippers that may want them to offload any of their homes, I don't think it'll happen that quick. But we're still watching investors as it plays into the market. And also I think tracking that pent up demand, how much of this is sustainable demand and how much of this is people that didn't buy in the third and fourth quarter of last year that are accepting the new reality? They've returned to the market. But it's not that deep of a pool. It's only a select people that are willing to give up their interest rate or are able to buy in today's market.
Joe: (40:05)
All right. I have one more question and it's kind of a wild card. And I've never asked a question like this before. But I asked this question to ChatGPT and I was really unimpressed with the answer. Because I said, "All right, what's the next Austin? What's the next hot city?" And it was like, "Bozeman, Montana." I'm like, yeah, I know. I've read a hundred articles about Bozeman, Montana. What is a market that is genuinely under the radar in your view, but actually interesting in terms of where things are bubbling up?
Ali (40:30)
So what I will say is under the radar is tricky because anything that was under the radar became on the radar if it was attractive over the past couple of years. So I don't want to say Charleston or Greenville or any of the small markets in the southeast because those are not hidden gems anymore.
Joe: (40:49)
Right.
Ali: (40:50)
Markets that I think potentially could grow. I always want to look at interstate highway connectivity and airports. You want to look at a share of the population that's relatively young. The home ownership rate is low enough that it's allowing for mobility. You want to see some kind of job stability.
I am not biased, but I do think Columbus, Ohio is still a market that has the potential to grow. I think Richmond, Virginia is a market that has a lot. It's close enough to DC. Close enough to an employment center, and it has its own employment base. It has the interstate highway system. I think that that market has some potential. Thinking further out, Portland is not under the radar in that you don't know it, but it's a market that didn't really boom like some of the other areas because there was some stigma about living in Portland
Joe: (41:44)
Which one? Which Portland?
Ali: (41:45)
Portland, Oregon. And so I think that market can still see a lot more growth relative to what it has seen. But again, I mean even the Fayettevilles of the world have become on the map. So it's really hard to point to...
Joe: (42:02)
Tracy and I were there a year ago.
Tracy: (42:05)
The construction was crazy.
Joe: (42:06)
Fayetteville's nice. But yeah, definitely not under the radar. Ali that answer was so much better than the ChatGPT answer. Thank you so much for coming back. That was such a helpful conversation. Really appreciate you coming back on Odd Lots.
Ali: (42:17)
Thank you for having me.
Tracy: (42:18)
Thanks so much, Ali. That was great.
Joe: (42:20)
That was really good. I love talking to Aliso much. I just find her to be really good at both big picture like themes, but also knows so much that's granular specific data. I always feel like I learn a lot from her.
Tracy: (42:46)
Yeah, there were a bunch of things that jumped out at me from that episode. One of them was this idea of the third option. We're so used to talking about housing in terms of like, you have two options, two binary options. You either buy a house or you rent. And over the past year or two because of high inflation, there was this argument that like, “Oh, it’s actually a way of protecting yourself from higher prices, from higher rent.” If you go out and buy a house, get a mortgage. But there is that third option, which is you just opt out of the market entirely and say, "You know what, rent prices are crazy. House prices are crazy. I'm going to move in with some roommates or move back with my family."
Joe: (43:26)
Should we split a house?
Tracy: (43:29)
Honestly this would save me a lot of money.
Joe: (43:31)
Same. There's another thing that she brought up that as one of these things that I've wanted to do an episode on for a long time, which is electrical components. If you go to the ISM Manufacturing Survey, there is a section in there on commodities in short supply. And there are not many left because actually most of the supply chain crises have eased.
But for a number of consecutive months, the commodity that's been in short supply — electrical components, 30 straight months they have been listed in short supply. The next most common is electronic components, 28 straight months. So this remains this huge bottleneck to everything. And then when you think like layering on the Inflation Reduction Act and all these energy investments, etc., this is still and I don’t think many people are talking about it, so I'm really glad that Ali brought that up.
Tracy: (44:18)
Well, since we're on the subject of bottlenecks, this is something else that kind of jumped out at me from that conversation. It's the idea of like maybe what we are seeing is a classic bull whip effect amongst the home builders themselves. Because they know that timeframes to complete construction have become much longer. They know that it takes a lot longer to get permits and things like that. So why not start now? And even if the market softens a little bit down the road, you'll be better prepared.
Joe: (44:46)
I think there was a question to Powell at the end of last year and it was basically one of these questions like "Look, what do you say to the person who wants to buy a house and you're jacking up rates and what do you say to that first time home buyer?" And his answer was something like, “yeah, it's not great that rates are going up. We acknowledge the pain, but this is a necessary step to bring basically some level of sanity back to this market.” And I see no evidence that that's happened. If anything, it just seems even more crazy
Tracy: (45:13)
Even weirder.
Joe: (45:13)
More bull whippy. More uncertain. More reasons for home builders to not be able to plan these different timeframes. As you mentioned with the sort of longer cycle, the multi-year cycle for land acquisition. I do not get the sense that the rate hikes, whether good or bad, have done much to restore something that people would resemble a healthy housing market.
Tracy: (45:36)
Well, also if you're talking about inflation and, you know, consumer power, it seems like there is still a large bulk of those that own homes who just are not necessarily feeling any constraints at the moment. They would've gotten mortgages at relatively low rates. Their home prices are still relatively high and it feels like they have a lot of bargaining power still.
Joe: (45:59)
And all the Boomers are gonna move to the boom towns.
Tracy: (46:01)
That too!
Joe: (46:02)
The Boomer Boom towns! They're all going to move to Phoenix and to places where their kids are. So awesome.
Tracy: (46:06)
It always comes back to Boomers. We can end every episode of Odd Lots by blaming Baby Boomers for something. But shall we leave it there?
Joe (46:08)
Let's leave it there.
You can follow Ali Wolf on Twitter at @AliWolfEcon.