How America Could Soon Be Oversupplied with Homes

0:00People have been screaming about the silver tsunami for more than a decade. But what does the recent data and a new analysis say about housing demand in the generations to come? How will builder sentiment and construction trends potentially offset some lower housing demand? And will one of the hottest asset classes in real estate get banned from major metro areas? Today, we're going through the most important headlines making news in the real estate world. This is On The Market. Let's get to it.

0:37James, Kathy, what's going on? How are you, Kathy? I am doing amazing. I'm in Snowbird's Business Center. I hope nobody is planning on doing any business today because I'm dominating this room today. But I had a very surprising wake up this morning. There was eight inches of fresh pow, and I can't even believe it. It's somehow the season just came at the end of April. I'm so jealous. James, how are you? Are you as good as you look right now? You know, I just got good lighting going on, I think, right now. That's really what it is. All right. Well, we got housing market activity to talk about. Me, Kathy, and James each brought a story.

1:17Henry, by the way, I think is at his daughter's dance recital, which is just adorable. So we're going to let him off the hook for that. But we have important stories to talk about today. And I think I'm just going to go first because I just read this super interesting article. It's not exactly news, but it is a new data analysis just about housing and demographics in general. This is written by Bill McBride, who writes a blog called Calculated Risk. It's really good. I don't know if you guys follow this at all, but really good information. Sort of famously called the 2008 crash, Bill McBride. He's often right about this stuff.

1:53And so he released this analysis of the question I think we've all been wondering for like 10 or 15 years, is the silver tsunami a real thing? And if so, what does it mean? So before I get into some of the data Bill shared, Kathy and James, we've all been hearing about this for a decade. Kathy, what do you make of the idea that there is a silver tsunami and does it matter to you? Well, yeah, because I am going to be silver sometime soon. You're part of the tsunami. me. No, I looked at the chart. I didn't like it. I didn't like it, how it's going real down on the baby boomers. That basically means death.

2:38That is what it means. But it's very obvious if you just pull back and say the baby boomers were a huge, huge demographic, the millennials as well, which is basically their kids. So when the baby boomers' huge demographic starts to age, things are going to change. Anything that the boomers did, it affected society. When they all wanted to buy homes, guess what? Prices went up. When they all invested in the stock market, stocks went up. Well, as they start to kick the bucket, then we're going to have more homes on the market. The question is, is it going to be all at once? Of course not. It's a big generation, 20 years.

3:18So yes, of course, the ones on the higher end of that and facing the 80s, they're going to, basically the article saying historically they're moving, they might be moving, changing their situation. And then you've got the millennials, you know, what are they going to be doing? But that the bulk of those people, that means there's a big generation, but behind it is a smaller one. If you've got a big one, that behind it's a smaller one. So that's what so often we fail to see. We kind of failed to see this big group coming. We weren't prepared for it. Now everybody's building. and as it moves through the system, there's not enough people behind them maybe for all the new housing that's about to be built.

4:01Right, and it just feels to me at least like a little bit that the timing is a little odd, right? Because like all the building is happening as we're not yet, but sort of like entering a time where millennials are gonna be sort of past the peak home buying age and we'll be in Gen Z, which is a smaller generation. I should say it's not that much smaller of a generation though, right? But like it is, I think it really starts to get smaller when you get into like, what is it? Gen Alpha is the one after that. That will have implications. But I'm just curious what you think make of the timing of all this, right?

4:35Like, are we building too many homes to the point where, yeah, we're in a housing deficit now, but could the pendulum swing back all the way in the other direction? Well, it appears to be. And a part of that, a huge part of it is immigration. And we have seen a dramatic decline in immigration. Of course, we saw a massive growth of it over the prior four years, but that has come down dramatically. And let me tell you, multifamily operators are absolutely feeling that. They're seeing more vacancies because there's just fewer people needing those apartments. So, yeah, you need people for real estate.

5:11And if you start to see a decline, whether it's immigration or these large cohorts, these groups of people that maybe finally have found housing or there's just fewer of them behind them. But I agree with you. There's still a lot of people here in the U.S. There's still plenty. But is the shortage of housing as big as like the Trump administration just came out and said 10 million or what was it? They all range. I feel like it's everywhere from one to 10 million. I've always, you know, the more reliable, I feel like it's like four, three to five million is kind of like the consensus average. Still a lot, though.

5:47That's a lot. And I agree. We've seen both ends of the spectrum on immigration, both legal and illegal immigration, too, just so everyone knows. Like, we did see a huge spike in, you know, I think it was 22, 23 was the highest. Now, both illegal and legal immigration is down nationally. And so we are seeing less demand for housing. and I'm curious James like what do you make of this do you think this plays out in a way where we're gonna see less aggregate demand for housing could we go from a supply deficit to a supply glut and how long could that take I mean it makes they have to start trading down we see this all the time right like a lot of the homes that we're buying we are buying a lot bigger homes that are you know they need an update and then people are transitioning down into other products or they're moving into.

6:38We buy a lot of probate deals and people that are transitioning into new housing. I would say we've done, we're kind of a preferred buyer in our market for a lot of brokers and people that actually relocate people into even senior living. The weird thing is, I would say the deal flow the last three years on that segment has been at least 50 % less than I've seen. Well, you mean boomer selling specifically? Boomer selling, but they're not transitioning into old folk, at least from our data set. They're just not transitioning as much. We work a lot of families that want a private sale where they can do it structured on their terms.

7:18They just want a dependable buyer. They want to be able to move out in the 90, 120-day window and get relocated. The weird thing is that lead flow in companies that I know do that, they have almost no inventory going on. Interesting. And so it's like, are they actually selling or, you know, I think also a lot of these boomers, too, I have been seeing that their families are moving back into the houses and now they are becoming just residents of the houses. So the houses aren't changing, changing hands. Yeah, we're seeing more multi-generational living for sure for affordability. Right. And is that going to come even more when the alphas come?

7:57Like, it's like, are people moving back in because they just can't make a pencil either way? They're like, well, I could sell, get the money, but it doesn't get me as far now. Yep. Yeah. And so I do think that could lead to an oversupply of product because the buyers aren't there. Yeah. I think this is this people have been screaming about the silver tsunami for like 15 years. Right. And I guess it was never going to be a tsunami. Like there was no scenario where all of these boomers sold at once. Right. It's just kind of crazy. And people say, oh, my God, there's like whatever tens of millions of boomers.

8:29I should mention, like James just said, one of the biggest groups of sellers is always people who are retiring and aging, right? Boomers are a bigger generation, but like these people who point to, you know, oh, my God, there's 20 million boomers. Like, yeah, but like there's usually 15 in that same spot. So it's not like it's this huge thing. But then there's also all these just societal trends like James mentioned, people moving back in with each other. there's a higher desire to age in place we see that more people want to do that and then the same thing like boomers are also perhaps even more so impacted by the lock-in effect because like they downgrading is more expensive than staying in your home right a lot of these homes are paid off why would you move out of a paid off home to go pay for an expensive home with a six and a half percent mortgage rate.

9:23It doesn't make any sense. And so I think it will happen, right? Like it's just destiny, right? Like people are going to die, unfortunately, but that's just going to happen. But I think it's going to be longer and more drawn out than people say it is. But overall, my after reading this, and I actually did an episode on this on on the market a couple of weeks ago, I do think there's going to be less aggregate demand, like not in the next five years. But if you get halfway into the 2030s and the 2040s, I think the pendulum will shift from undersupplied to oversupplied market. I don't know if you guys agree, but I'm curious what you think the potential implications of that could be.

10:04I mean, supply and demand is everything, right? If there's more supply, not enough demand, prices level out or go down. So it's hard to say what the future will be based on immigration policy. But that's really the ticket. That's the key because our birth rates are going down. That's right. You know, so that's a problem. And when we look at other countries like Japan and China where they're not, they have low birth rates, but they also don't have a lot of immigration, that's a big problem for them. And so far the U.S. has been okay because we have been having babies, but that's slowing down. And we also have been pretty open with our immigration policies, and that's changed dramatically.

10:46So something there, either people have to have more babies or we have to open up the gates or stop all the aggressive building. But again, I was right. The Trump administration did come out and say that we are short 10 million homes. And a new White House report lays out a blueprint to fix that. That's from AP News. So again, if there's government incentive to build more houses, we could do what we've done in the past and suddenly find ourselves overbuilt. Yeah, I agree. I mean, I personally don't see the birth rate changing much. I have a hard time imagining what changes that. There's just a new report that came out like two days ago that the average cost to raise a child in the United States now is$300 ,000.

11:32It's crazy. For most people, that's just unaffordable. So, you know, there are other reasons people are having fewer children, but most people who say they're having fewer children cite the cost of child care and raising a child is the number one. I don't see that changing anytime soon. Immigration policy, who knows, right? Like we've seen the pendulum swing back and forth the last couple of years. We don't know where it's going to be. But my feeling is we're going to have less aggregate demand for housing. And I don't think that means you can't be a real estate investor. I actually think it creates some interesting challenges, but also opportunities.

12:06When I was reading this report and similar reports on it, it also talks about how baby boomers own some of the best real estate in the country and that we're going to start to see really good inventory come on board. Now, we might not see the same across the board massive appreciation that we've seen when there was higher total demand, but you might be able to get really good assets in good locations. And actually, you mentioned, Kathy, Japan. If you look at what happened in Japan, a lot of rural and suburban and tertiary markets have seen falling home prices. But prime locations are fine. They're still growing, right?

12:41And I think that's probably what's going to happen here. Yeah, you better be very careful what you buy. During 2009, when we had the housing crisis and there was just a glut of houses on the market, But the areas like Stockton that are further out, prices went down 75%. Because if you could live in the Bay Area, why would you be an hour out of the city? We even heard of a developer who had built this whole community, 2009 hit. They just tore it all down. They're like, we can't sell any of it. So you've got to be very careful and more than ever be aware of don't be too far out from jobs. I always like to be 10 to 15 minutes driving from jobs, from a strong job base, because those are the homes that are going to be in demand.

13:32And one thing about demand, you know, it was interesting actually when we did that value add conference, I was talking to somebody and he was looking to buy a house because they lived in California. I'm like, well, where do you want to buy? He's like, my mom doesn't care. We're going to the state with the lowest estate taxes. And in this kind of report, did it talk a little bit about like where these things are being bought? Because that's a lot of the planning now. Like in Washington, you don't want to die in Washington and have an estate. It's the 20 % estate tax in Washington with an exemption of$2.2 million.

14:07And it is one of the worst. and then, you know, the best states with zero estate tax are like Arizona, Florida, Nevada, Texas. That might be a big trend for some of the silver tsunami because, you know, as people need more capital, like, you know, I know for me, if I'm going to go, I hate to say this, die somewhere, I want to make sure my kids are being the most taken care of. It's like, I'm going to go from dying one of these states with my estates, right? And I wonder if that's going to go into some of this planning and development, like, hey, this is attractive to move your parents here and get their estate and everything rolled into these states.

14:41Because when you're talking about 20 % different on your tax, that's a huge, huge difference. Yeah, well, this is something we're all just going to have to watch. I feel very confident that even if there's lower overall demand, there will be markets that grow. There will be markets that don't. We're just going to have to see how these things develop. Like James said, is it based on where boomers are moving? Where I personally think there's going to be a lot of labor market disruption in the next couple of years. How does that all settle out? where are the job centers in the future? Maybe they'll stay the same.

15:11Maybe they won't. We're going to have to see that. But those are the things I'm personally going to keep watching. One of the big variables here, though, that we haven't talked yet about is construction. Because we've talked about how much the birth rate and immigration, which is kind of on the demand side. But a big element of whether or not we go into a supply glut is how much we're building. And after the break, James is going to share with us some information about builder sentiment. We'll be right back. You know what's funny about tax season? It's one of the only times I actually look at my full financial picture.

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18:42Welcome back to On the Market. Kathy, James, and I are here sharing the latest news and data we're reviewing around the housing market. Before the break, we talked about the baby boomers, whether they're going to sell, what it means. But we only really talked about the demand side. But there's this whole supply side about how much construction happens in the U.S. That's going to be a huge factor in whether this silver tsunami comes true. So, James, tell us what's going on with construction. U.S. home builder sediment drops to seven-month low in April. NABH survey says. And this is something I've been kind of paying attention to, especially the last 12 to 24 months, because I'm always looking where the opportunities are.

19:21I would say recently we've been able to pick up some property that has good development potential down the road. And we've been able to do that because builders, man, they're turning into kind of the rain clouds of the industry. Like when you talk to Bill, I have a lot of clients that are builders, we're builders. It is not looking good right now. Yeah. And the P &Ls are saying it. Like I can say, hey, we haven't made a whole lot of money building houses the last 12 to 24 months. And the sentiment is real. They're saying now for 24 straight months, over 50 % of builders have a negative outlook on the next 12 to 24 months.

20:01And since the Iran conflict and the energy spike, it has now dropped to a seven-month low at 34%. So that means it's 64 % of builders, they just do not feel good about the market. And this is coming from, you know, material hits, transport costs, fuels up 35 % since this conflict. And as you're in the middle of your build and you're going, okay, this is, we're getting hit with more costs. In addition to now rates have jumped up, you know, since the bombing of Iran, it's gone from 6 % to 6.3, 6.4 in weeks. And we've seen it kind of spiking every which way. and builders are just seeing higher costs across the board, whether it is their building costs are up because of energy prices.

20:4770 % of them are having problems selling their houses, according to this article. In addition to, they're saying that over 60 % of the transactions are still giving out a lot of buyer concessions. So even if you're showing a higher number and they're dropping price, they're still giving away a lot of money just to get that deal gone. And I think this is a major problem because, you know, even though Trump may have said that we're short 10 million houses, there's a lot of inventory coming online that is not being absorbed. Oh, yeah. I mean, I was looking at in Kirkland, Washington, which is one of our best markets in Washington.

21:24It is like people want to live there. If I had to move back to Washington, I'd be moving into Kirkland. It's a great, great neighborhood. The absorption rate on new construction on cottages and daddus is like, 13 to 14 % right now. My business partner sent this off because we have some we're building right now. And there was like 35 came online and six went pending last month. Wow. And that's a problem. So the thing about this is we might see a slowdown in builder start because even when I find good lots to sell, builders like, eh, I really don't want to look at this right now unless we can close on a permit and wait and have a long feasibility because they want to be able to spot check in.

22:03And so the aggressiveness of builders has definitely pulled back. Like me and Dave just recently did a podcast on flipper sediment and that flippers are feeling good. It is completely opposite in the building community right now, at least for the guys that I'm dealing with. And the article talks about it. And when you have cost up, land has not dropped like it should. And 60 % of properties are still giving incentives. Plus they're selling them for 5 % less off list and they're cutting price. You're getting squeezed on all sides. Builders are really getting beat up right now. Oh, yeah. My builder sentiment is very low.

22:40A survey size of one is very low. Yeah, I mean, we've got developments in very popular places like Bozeman, Montana. And that development, I mean, it's a lot of homes that we're building there. But over the past few years, they were selling steadily. it just came to a screeching halt over the past few months. We're also in one of the fastest growing parts of Nevada, right outside of Reno. And same thing, this is where so much new business is moving. We have a development there. It was really starting to pick up at the beginning of the year when rates went down. Now, crickets. And you know, holding costs are insane.

23:22And then on our other deal. We're having to take price cuts. That's the only way to move it. So great for buyers. Very difficult time to be a builder for all the reasons James just said. The prices are high. The costs are high. The debt is high. The labor is high. Inflation is real. And yet the sales price is not inflated. So it's tough. I want to talk just about sort of the implications sorry about this. First of all, that sucks. From a buyer perspective, it does present an interesting opportunity. Someone actually just sent me a whole build to rent community that they built and they were offering just off the bat without even negotiating 12.5 % off list price.

24:05It's like, okay, there's some interesting things going on there, right? So how do people take advantage of that? Because that was honestly a question I have for myself. I don't think I'll do this deal. It's not in a market that I'm comfortable with. But I was like, where are the rest of those deals? Because I want to buy something like this. And that's the thing is our company is on both sides of this equation. We build houses, but we also buy them and we help people buy them. And we are in our single family rental fund in North Dallas. We are buying new homes at massive discounts for that very reason.

24:39Builders, you've got holding costs and those holding costs add up really very quickly. The construction loans are high. So if you can't get out of that, you know, you're just losing money every single month. They'd rather just take a price cut. So in some cases, we're getting stupid good deals on the buy side. On the sell side, it's just one of those things where it's business, you know, it goes up and down. Right now, it's not great. It was really good a few months ago. My thought is there needs to be housing inventory, right? If we're short 10 million houses, you know, where's the opportunity, right?

25:12Like when there's pain in certain sectors, building community, big apartment purchasing, right? The syndicators have been a little beat up on some things. There's opportunities that come through and that's what you want to look for is where is the opportunity. And it's a really good time to snag like a burr property with a little bit of extra yard. That is like if you're in any kind of metro area, that is just whether it cash flows well or not. And you can even, And you might get a very average cash on cash return, but there's a lot of upside in there when you can buy on the dip because what we haven't, we've seen some sellers on dirt get a little bit more flexible, but a lot of these are the big boomers that we've also talked about that are really, they were banking on selling their property for this much and they're getting very stubborn too.