The Fed Hiked Rates Rapidly and Housing Is as Broken as Ever

25:33Builders 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.

26:08And 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 builders 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, start should be up as well.

26:48So that's what we're seeing is this new realignment of starts coming back up to the fact that sales are stronger than expected. Well, you mentioned land there, which is a good seg to dive deeper into this. And we did, I think back in March, an episode with Chase Emerson and the Arizona market. And he basically made this argument exactly, which is like all these homebuilders walked away or wanted to walk away from deals or pause land acquisition, and they're going to regret it because as soon as homebuilding picks up again, they're going to be short and they're going to have to come back and pay more.

27:19So what are you seeing on the land acquisition front right now? So I think a really important difference between this cycle and past cycles too, is 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, great podcast you guys talked about.

27:53It takes a long time to take land through horizontal development, to get it ready for 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 There were a lot of builders that dropped a deal last year or changed their terms.

28:34But 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 deal back. And the seller says, great, but you got to 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.

29:06So 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 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?

29:42To the labor hoarding, you have some of the builders say that specifically is 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 skill set. 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.

30:19So you need to be absorbing whatever is available to get yourself in a good position in the future. So how much could that activity be sort of obscuring real demand at the moment, I guess is the big question. So in terms of builder demand for land is your question? 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. Yeah, I think there's a lot of 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.

31:01So 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.

31:41And that's contributing to an increase in overall land and lot availability right now. 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 can maybe think on different timeframes. What are we seeing 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 of public versus private players?

32:16Crazy difference. Yeah, 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 Band-Aid 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 landslide.

33:01So 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.

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36:19You 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 happen? 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.

37:00Tracy, this question is spot on. 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.

37:45So 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 Bandline says the third biggest reason people move is retirement.

38:27Boomers 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, let's just use California 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.

39:04So rather than boomers being this net marginal supply that sort of like eases the market, boomers may 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. Yeah. 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.

39:38But then you have an all cash boomer or a millennial with 3 % down. And there's one group that wins out over the other. 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?

40:16And especially in the wake of the banking drama of March, where we did see some banks start to report that they were tightening lending standards. 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, are saying, but buyers may be demanding more inventory. We may be wanting to build more homes.

40:56We 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.

41:45And that's been a key driver of housing activity recently as well. It does also speak to this question of like, 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. 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.

42:18We 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 sees 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. Well, on that note, talk to us about the affordability aspect of it, because it feels like we're still further away than ever to building a sort of sustainable market where people are able to get a foothold.

43:07Yeah, 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.

43:41And 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 costs, 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. 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.

44:19There's only so many public sector employees and we know that homebuilders have had a hard time like hiring, but also public sector is, you know, 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 they're still overworked. 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.

44:55But 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's solved. Kind of the flavor of the week right now is transformers and the role it's playing in the market. Yeah, 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.

45:31But 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. 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.

46:13So 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 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?

46:49They'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. 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 chat GPT, and I was really unimpressed with the answer because I said, all right, what's the next Austin? Like, what's the next hot city? And it was like Bozeman, Montana. I'm like, yeah, I know. I've read like 100 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?

47:24so 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 right right we know about yeah markets that i think potentially could grow i always want to look at interstate highway connectivity in airports. You want to look at a share of the population that's relatively young, that maybe still doesn't have the home ownership rate is allowing them to, it's low enough that it's allowing for mobility.

48:06You 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 of the it's close enough to dc close enough to employment center 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 and 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 which one which stigma about living in portland oregon oh oregon Yeah, yeah.

48:44And 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 a market that didn't work. Tracy and I were there about a year ago and we're like, oh man, Fayetteville's nice. But yeah, definitely. That answer was so much better than the chat GPT answer. Allie, well, thank you so much for coming back. That was such a helpful conversation. Really appreciate you coming back on OddLots. Thank you for having me. Thanks so much, Allie. That was great. That was really good.

49:28I love talking to Allie so much. Just so much like, I just find her to be really good at both big picture like themes, but also knows so much granular, specific data that I always feel like I learned a lot from her. No, there were a bunch of things that jumped out at me from that episode. One of them was this idea of the third option, which 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.

50:04If 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. So should we split a house? Should we split a... Honestly, this would save me a lot of money. Same. There's another thing that she brought up that is one of these things that I've wanted to do an episode on for a long time. Electrical components. If you go to the ISM manufacturing survey, there is a section in there on commodities in short supply.

50:41And there are not many left because actually most of the supply chain crises have or problems have eased. But the number of consecutive months, the commodity that's been in short supply, electrical components, 30 straight months have been listed in short supply. The next most common is electronic components, 28 straight months. So this remains like this huge bottleneck to everything. And then when you think like layering on the Inflation Reduction Act and energy investments, et cetera, this is still this like, and I don't think many people are talking about it. So I'm really glad that Allie brought that up.

51:12Well, 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 bullwhip 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. And I just think it was a question to Powell at the end of last year. And it was basically one of these questions like, what do you say to the person who wants to buy a house and you're jacking up rates?

51:50And 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, more bull whipping, more uncertain, more reasons for home builders to not be able to plan these different timeframes. as you mentioned with the sort of just the 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.

52:30Well, also, if you're talking about inflation and 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 have 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. And all the boomers are going to move to the boom towns. That too. The boomer boom towns. They're all going to move to Phoenix and the places where their kids are. 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?

53:08Let's leave it there. All right. This has been another episode of the Odd Lots podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway. And I'm Joe Weisenthal. You can follow me on Twitter at The Stalwart. Follow our producers, Carmen Rodriguez at Carmen Armin and Dashiell Bennett at Dashbot. And check out all of the Bloomberg podcasts on Twitter under the handle at podcasts. And for more OddLots content, go to Bloomberg.com slash OddLots. We post transcripts. We have a blog. We have a newsletter that comes out Friday. And for even more, check out our Discord where listeners and viewers are chatting 24-7 about all of these topics.

53:47We have a great real estate channel in there, one of the most active ones, all kinds of interesting stories getting posted from around the country, what's really happening in the real estate market. Go there and check it out. Thanks for listening.

54:29Hi, this is Shirley Strawberry from the Steve Harvey Morning Show. Toyotathon is on. So stop by your local Toyota dealer for incredible year-end deals on the cars, trucks, and SUVs. known for their legendary reliability, like the stylish and efficient Camry, the ready-for-anything RAV4, or check out a rough-and-rugged Tacoma or Tundra, all with great financing and lease options available to qualified customers. Visit buyatoyota.com to find out more. Toyota, let's go places. This podcast is brought to you by FedEx, the new power move. Hey, you know those people in your office who are always pulling old school corporate power moves like the guy who weaponizes eye contact.

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