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- [00:11]
A
Join Willie Walker, Walker and Dunlop's chairman and CEO, as we bring you fresh perspectives about leadership, business, the economy and commercial real estate. Willie hosts a diverse network of leaders as they share wisdom that cuts across industry lines. His guests are experts in their fields, from leading economists and CEOs to Harvard and Yale professors and everything in between. Our one goal is simple, providing you with unique insights, unparalleled data and real time market analyses.
- [00:44]
B
Welcome to another Walker webcast. It's my great pleasure to have my friend and colleague Ivy Zelman join me for I don't know what. Actually, I can't, I didn't go back and count all of them, but I know at least you've joined me on five Walker webcasts, if not more. And I actually this morning was back looking at my notes, Ivy, and the first time I had you on the Walker webcast was almost exactly five years ago today. It was, it was on August 25, 2020. In the depths of the pandemic was the first time you and I got together on the Walker webcast, which it was, it just jumped out at me and I was like, wow, has it really been five years since the two of us had our first discussion? Really neat.
- [01:28]
C
That is cool. I didn't really.
- [01:30]
B
Yeah, yeah, I, I was, I looked at, I obviously watched you on CNBC earlier this week. You and I have a lot more time here to dive into a number of your answers to Joe Kernan on cnbc. He was, he was trying to get you to both predict rates, Ivy, as well as pick some winners and losers in the housing market. And either it was because it was, and I will say it was, I say only a seven minute segment. The seven minute segment on CNBC is quite a long segment actually. But the two of you didn't really have a whole lot of time and you were smart enough to dodge the question as it relates to where rates are going to go. I'm, I'm going to try and push you a little bit on that as it relates to Zelman's outlook, as it relates to higher for longer. But I certainly know I'm not going to get you to pin down where you think the 10 year is going to be at the end of the year or a year from now. As I, as I was doing my research for this discussion, I went through and looked at Zelman's research year to date. And you know, the earning season on Q2 was very strong and we've got, you know, year over year, 12% profit growth in the S and P and we've beaten consensus by about 5% across the publicly traded companies in the housing sector. It's been interesting as it relates to the covered sectors in housing that Zelman covers, as it relates to the performance of various companies in various sectors. Let me just run through those and then give that as a backdrop for you to dive into what's both surprising to you and if you will, disappointing to you as it relates to year to date performance. So if you look at the mortgage industry that you all cover, it's up 48% year to date. This is as of day before or yesterday morning is where this is. It's up 48%. Furniture is up 17%, building products is up 13%. The home builders are up 11%. The S&P is up 8%. Then we look at, um, the. You get through the manufactured housing, which is actually off 3% which you've just started covering. You've got SFR off 6% single family rental and then you have the apartment rates off 10% year to date. So talk that through. As it relates to what out of that performance year to date in the kind of housing, all the various component parts of housing, both is a surprise to you and also what's a disappointment to you?
- [04:14]
C
Well, as it relates to the stocks which tend to disconnect from fundamentals, at least current fundamentals, I think that the outperforming sectors within our ecosystem really is attributed to the expectation that we're going to see lower rates and the Fed is going to start cutting, which is typically when you start to see those sectors. On the for sale side, mortgage side, building products outperform. And on the flip side, the multifamily and SFR as underperformers is the expectation that the for sale market will start to gain some traction at their expense. Now, I don't necessarily agree with all that, but that's what the expectation I think that you'll continue to see. As long as there's the perspective that the Fed is going to cut, whether it's, you know, two 25 basis point cuts before year end and continue to cut into 26 as the likelihood that PAL steps down and we get a replacement. That seems to be what's driving a lot of the stock's performance right now.
- [05:13]
B
So in three weeks, you and I will both be in Boston for the Zelman Housing Summit. And you always start that off with your state of the housing market keynote. Give us a, give us a preview on what you're going to be talking about as it relates to the state of the market and the key themes that you'll be underscoring to the people attending the housing Summit.
- [05:35]
C
You know, overall I think we're trying to just dissect what's happening in the fundamentals and appreciating that one of the big drivers for the for sale market, at least on the new home construction side, has been rate buy downs and sort of exploring the impact that longer term rate buydowns have and the implications for profitability. That will be one part of the discussion for at least on the builder side. We'll talk about pace versus price price and our expectations for elevated incentives to continue to pressure price. We'll be talking a lot about overall consumer credit and anticipating some challenges, some headwinds that we see out there. One, for example, student loans that are seeing significant defaults and the likelihood is we're going to start seeing in September wages being garnished. That's a real headwind. We'll also talk about what's happening more broadly in the rental market and the opportunity for the rental market to continue to provide shelter for those that are challenged. From the consumer credit side. Those are a few points come top of mind, but lots to explore on the cost side, whether we're looking at the cost of labor, cost of land, overall building product input costs. We'll be diving into that as well.
- [06:57]
B
So when you and I spoke back in January, you mentioned that at that time tariffs were we hadn't gotten deliberation day yet. Tariffs were only a concept at that point rather than that chart that the president put out in the Rose Garden as it relates to the tariffs they were going to apply on countries. We clearly haven't gotten that chart, if you will, coming to fruition, but we've clearly had new trade deals done. At that time you thought that tariffs would add 3 to 5% inflationary pressure on building costs. Talk for a moment about it's clearly early days. Everyone's trying to figure out how tariffs are playing into everything from GDP growth to the inflation print into the cost of housing. What are you either seeing or either surprised at to the upside or concerned about to the downside as it relates to the impact of tariffs, as it relates to housing.
- [07:53]
C
Well, for the new construction market, actually the tariffs have not had any inflationary impact whatsoever. In fact, overall input costs, costs, direct costs are down for most builders, down, call it 1 to 3% for the largest builders in our sector. And that's really given the fact that spring was a bust and back in January, the spring selling season didn't materialize as many would have hoped given the lack of affordability. So builders have been pushing back to their vendors and threatening to switch. And so they've really had success in not realizing any of those price increases that the vendors have tried to push through. Flip that to the home improvement market where there has been more success for vendors to realize price. And we're continuing to see that reflective in Home Depot and Lowe's results. They're definitely seeing some upward pressure on price that they're passing through to the consumer that they're realizing. So it's a bit of a tale of two markets where the home improvement market's feeling the tariffs but still relatively marginal and the new construction market is actually pushing back and not seeing any impact as of now.
- [08:57]
B
And as you again, it's early days. Do you do you think that if, I mean, clearly all the trade deals have not been negotiated, so it's impossible to know exactly what the overall tariff rates are going to be. But so far, if it hasn't shown up, if you will, it's shown up in two different parts of the segment. What's your take from here in the sense that a lot of people are saying tariffs will make their way into inflation or make their way into a downward pressure on GDP growth if they stay in place. And I don't think anyone is thinking that either the president capitulates and doesn't continue forward on these trade deals or that the trade deals that he's already struck don't stay in place. So as you think about a print over the next year, from a both a GDP standpoint as well as an inflation standpoint, do you think we see market changes due to tariffs in either GDP growth or in the inflation rate?
- [09:58]
C
No. In my ecosystem I'd say it's going to be a combination of tariffs will be inflationary and the home improvement market, but we'll see continued offsets in new construction. And new construction is a much smaller piece overall in terms of the impact. So it could be slightly inflationary and probably leads to keeping rates higher for longer, at least stubbornly high on the long end of the curve if those tariff increases continue to hit the market. And we already know that consumer is so stretched. So unless we had some significant rate relief for other reasons, I think it's going to be an upward bias to inflation, at least within the home improvement market.
- [10:39]
B
Dive into that for a second. As it relates to inflation and the dual mandate of the Fed as it relates to both the cost of goods and on the Other side, employment. Employment has held in quite well as we've had tariffs implemented. But again, it's early days and at the same time we haven't seen the inflationary pressure. Which one of those two do you think, moves that makes it so that the Fed either can cut or doesn't cut as, as it relates to where the overall their dual mandate. Which one of those two do you think they really start to focus in on as it relates to pot cuts in 2025 and into 26?
- [11:22]
C
I think it's above my pay grade, but I'd say that.
- [11:25]
B
No, it's not.
- [11:26]
C
I would say that the employment is going to be critical and if we see slowing job growth, I think that's going to be a catalyst for them to act more aggressively on rate cuts because I think that's been what's really allowed for more resiliency in the economy. So if you start seeing job losses impact the market, I think they'd be quicker to act, especially if tariffs have remained sort of in this, not really negatively impacting gdp, but the, you know, expectations, it could. I think they'll act more quickly if we start to see real pressure on jobs.
- [12:00]
B
And when you say real pressure on jobs, what do you think that number is? Is that, do we get to four or five? Do we get to five? Do we need to see five, five? What do you, what do you think is a. I mean, obviously, and this dives into the stats and the Bureau of Labor Statistics and things of that nature, but what, what unemployment number do you think gets the Fed to really start acting aggressively?
- [12:24]
C
Well, will Powell be in office or will there be a new governor? Because, you know, the expectation is we have a very dovish governor replacing Powell and I think any upward pressure on unemployment would give enough ammunition to a dovish governor to start cutting. So I think it really depends on who's sitting in that seat. But, you know, whether it's 4.5 and an upward bias to that, I would think they're going to start act, even if it's only, what is that, 30 basis points from here. Yeah.
- [12:53]
B
And so right now you're thinking that we'll get one or two cuts in 2025.
- [13:01]
C
I don't know. I mean, my, I just follow what, you know, the expectations are that are priced into the market. And I think right now the probability of two cuts has diminished. But, you know, if again, employment slows faster than expected, it could be two cuts this year. I just don't know. What troubles me, Willie, is that the expectations are that Fed cuts will result in improved affordability. But we know the Fed can only control the short end of the curve and therefore we're less optimistic that it really helps improve affordability at the long end, especially given the deficit and the expectation that tariffs could lead to inflation. It could be stubbornly higher for longer, even if the Fed is cutting. And couple that with auctions that aren't really being met with strong demand, whether it's foreign buyers or just people's expectations that we want to reduce their exposure to US Treasuries. So I think there's some headwinds on the long end, which therefore I'm less focused on what the Fed is doing and more focused on what's going to really improve affordability. And we know affordability is the worst that it's been since the early 80s when mortgage rates were at double digit levels.
- [14:10]
B
So I want to just really quickly put a data point behind what you just said and then, and then I do want to dive into affordability. So we went back and looked at the nine easing periods since 1980 and on average when the fed funds in those nine easing periods, fed funds have dropped 2.32% on average over those nine easing periods. And the change in the 10 year on average was down 72 basis points. So that's taking all nine periods and just averaging it out of what did the Fed cut and what did that turn into as it relates to, if you will, relief on the 10 year. If you then go and look at when they cut based around the recession, the, that is if on, on those the Fed has cut 4, 4% and what you get in the 10 year, there is a 1.56% decrease in the 10 year. But outside of recessions, the actual Fed cuts have only been 97 basis points and the resulting pickup, if you will, in the ten year has only been six basis points. And so the difference between cutting outside of a recession and cutting inside of recession is dramatically different. And, and, and, and I think to your point, Ivy, a lot of people, particularly in the commercial world, where we obviously spend every day, are sitting there saying, oh, Fed's going to cut and that's going to bring the 10 year down at a similar rate or maybe slightly less. And what the data would tell you over the last nine cuts is unless it's around a recession, you're not going to get that significant a pickup in the ten year. A matter of fact, it's only six basis points when the Fed is cut on average close to 100 basis points.
- [15:49]
C
Yeah. And I think with outsider recession we're also looking at headwinds that really didn't exist before and I. E. The deficit that is now the elephant in the room that's not being ignored as well as the continued pressure from inflationary upward pressure on tariffs that could continue. So the dynamics are different outside of a recession. In addition to what you said where the modest improvement in the 10 year outside of recession has been the case in and from a historical perspective.
- [16:16]
B
But I heard you say on CNBC that right now some home builders are being able to buy down rates to sub 4%. You said 3.99% is, is a rate that you could get if you go and buy a new home from one of the major home builders. And yet even with those rate buy downs you're not seeing a significant increase in sales. Two questions on that. How much that that seemed to be a huge stimulus effect to home sales in 23 and 24. Why is it not a stimulus effect in 25? And then I'm going to go to gross margins to the homebuilders after that just because we've seen some degradation in those gross margins. And I believe that's coming from those buy downs. But answer that question first on as it relates to the stimulative effect of those rate buydowns and why that isn't driving sales right now as it did in 23 and 24.
- [17:08]
C
Well really the stimulatory benefit started in 2H22 as rates spiked early in 22. We did see the builders for about 6 months really see a very sharp slowdown. And then they prudently brought in buy downs and that became a catalyst for activity to improve which continued really throughout 23 and 24 had been more challenging. And I think the second half of 24 really was a function of credit quality has diminished. I think inflationary pressures on our first time buyer have eaten in discretionary income. Ability to save. The credit scores are under pressure. Delinquencies are rising in various consumer credit sections or segments such as auto and credit card delinquency. So there's more pressure on the consumer. And what we hear from builders typically like Dr. Horton just we hosted them on a zoom call right prior to this call. And one thing management said is they're buying down anywhere from 100, 250 basis points from the prevailing rate and they'll do a 399 selectively on standing inventory. They want to move. So they might advertise that but they're generally Doing call it, if rates are called six and a half, they're going down to 5 or 4.99 more than the 399 that we see advertised. But the reason that we are told they're going that low is they can't qualify the buyer without a rate that low. So there's definitely more pressure on the consumer that has manifest itself since 22 when we first started seeing rates move higher. I think that might be the big difference today versus what we saw earlier on in 22 when we saw the benefit for those rate buydowns. And it's kind of one of the concerns we have is the rate buydowns, which are very expensive to buy. A 30 year fix down, you know, six to eight points or more depending on how low they go. You know, how do builders ever get off of that incentive? Call it treadmill. And in fact our survey that we published for July, we just showed that on a scale of 0 to 100, our incentive score, 100 being bad, was a 92. It was a all time record incentive feedback. So I don't see it changing very much now. Toll Brothers reported yesterday and they were a bit more optimistic. They had their call this morning. So I think we're in this world of the haves and the have nots becoming much more clear. I understand why Toll Brothers customer is better positioned. We also have the stock market hitting new records. Since Liberation Day, we've had a massive rally off the bottom that's helped improve consumer sentiment. But it doesn't change the lack of affordability for that first time buyer who's really struggling. And discretionary dollars are not there to save. And that's really why people are staying in rentals longer.
- [19:56]
B
And so there's so much inside of all that that I wish I could ask five questions simultaneously to you on all the things that you just said. So we have a real affordability problem. We've got the home builders putting incentives out there to move inventory. We have inventories up dramatically over the last two years. The inventories have moved up, I think 45% from Q2 of 2023 to Q2 2025. So we have a significantly amount more inventory as it relates to margins. One of the things you did mention, Toll Brothers, Toll Brothers gross margin dropped from 28.8% in Q2 of last year to 27.5%. That's Q3, sorry, Q3 to Q3. It went from 28.8% in Q3 of 24 to 27.5% in Q3. Of 25. So you some, some real degradation to the margin. And that's even with Toll Brothers, who, as you made a quick point to, is at the very, very high end of the single family housing market. They're, they're building a product that is, you know, well over on average, $500,000 per home. And I, I'm correct on that. I mean, I.
- [21:11]
C
Their median price is a million dollars now.
- [21:14]
B
So median price is a million.
- [21:15]
C
They actually have what they call luxury, affordable, luxury, affordable, affordable luxury homes. But I think margins are under pressure for builders above and beyond the incentives as well. Because keep in mind, the land that they bought pre Covid by the end of 26 will be all absorbed. It's been slowly diminishing as a benefit. And land is a third of the cogs. So that has also been a margin headwind for them. And right now, because the market's softer, they are trying to renegotiate with their land developers whether they have option contracts with. But it's stickier. That's the last piece of the equation to actually start to improve. Keep in mind, one thing I forgot to say on that earlier question was that the other factor that's really changed dramatically since 22 is the existing home market has seen inventories rising substantially in many markets, not all markets across the board, but inventories are up about 20% from a year ago. And we look at markets relative to the inventory where they were relative to 2019. And some markets that are seeing still very good pricing activity are still well below where they were they were pre Covid. Whereas markets like Texas and Florida markets are well above, you know, 20 to 50 to 60% above where they were pre Covid. So the dynamics of the existing market are negatively impacting also the ability for consumers to sell their homes. And therefore there's people taking homes off the market because they're not getting their aspirational asking price. So that's a part of the equation. That's also been a dramatic change from where we were when the rate buy downs were working and builders were gaining share at the expense of the existing market.
- [22:53]
B
Well, so the lock in effect which your team just published on, you know, right now, by your numbers, 72% of mortgages are below 5%, 54% are below 4%, and 39% of existing home mortgages are below 3.5%. So that lock in effect has a huge impact on the existing inventory. And yet you're saying that now we're seeing a step up in the amount of existing inventory coming on market, which somewhat belies that data that I just put out there. Is that just because. Is that because it's just, you know, the kids have moved out and gone off to college like you and I both have, and it's time to downsize. Is that that I'm a baby boomer and I'm, I'm ready to downsize after living in the suburban home? Or is that that people actually want the cash from their home because they've got so much built up equity in there that they're willing to swap out for, if you will, a, a higher current rate because they just got the trapped equity that they need to tap into at this time in the cycle.
- [23:52]
C
All the above.
- [23:53]
B
And I knew you were saying.
- [23:56]
C
I mean think about, you know, real estate has become in the last decade, post recess gfc, a popular place to park your money. So if you're an individual investor that may own 10 homes, let's say in Southwest Florida, where probably Fort Myers, that segment of the market is probably one of the worst parts of the country right now in terms of the existing housing market. You know, you're maybe a second homeowner, maybe you're an investor that's pruning their portfolio. Cost of insurance has skyrocketed. Homeowners insurance, as we know, property taxes are skyrocketing. So people are taking chips off the table. And in some cases it's not just primary sellers, it's second home sellers and investors because you don't see the same a magnitude of second homeowners investors in let's say the midwestern markets where they're still performing fairly well. So I think combination of regular life occurrences, the realtor community has got the three Ds, death, divorce, default drives transactions, no matter what's happening in the economy. And what we were missing is the discretionary sale. So now you've got fear that's in the market. And fear creates people to move more quickly because they're worried that the equity that they've accumulated could erode. So if they're in, I'll give you a great example. I use this quite often, but my architect in Cleveland called me as a second home in southwest Florida and he's like, oh, I can't believe it. I can't sell it. I'm one showing. So I said, well, when did you buy it? He said five years ago for 400. And I said, well, where'd you list it? 980. I've since lowered it to 775 and I still can't See it one showing and he's getting divorced. And I said, you know what, Rick, don't be so egregious and lower it to half a million and I promise you'll sell it. And he did, and he sold it. So I think people have this expectation they should get yesterday's pricing, but when in fact, they start to think, oh my God, my equity is going away, away, I better get at least some equity. So I think that's also what's happening. But, you know, it's very difficult without having the ability to ask the realtors, who are your sellers, who's selling? And people are migrating back from. If you look at the data from Texas and Florida and the Carolinas, you know, we saw a spike, a substantial spike in migration, inbound migration. Now we're seeing outbound, outbound migration that could be related to again, people realizing they don't want a second home or the congestion and traffic and cost of holding those assets in these markets because again, of homeowners insurance and property taxes. So I think the migration is normalizing, but that's also part of it, because really you can divide the country into the good and bad markets, and the COVID winners are now the COVID losers. And they're the ones that are seeing the most pressure where we saw the most inbound migration, as well as where builders are the most concentrated. So if you say where are builders have the highest market share? And by the way, not just builders in total, but where are Lennar and Horton present with the largest market share? You can see that those markets are gonna have the most pressure because they're offering the most incentives and they can really dictate the market trends.
- [26:59]
B
You mentioned Lennar and Horton. I think in 2024, 45% of new homes constructed were constructed by the top 10 public trading, publicly traded home builders. Talk for a moment about the increased consolidation in the home building market post gfc because it was a much more fragmented and diversified industry. And what you've seen over the last 15 years is this continued consolidation into the large publics. Is that good or bad for the overall housing industry?
- [27:33]
C
Oh, well, I think the public builders overall, not just looking at the top 10, account for roughly 57% of new home sales today. Just to give some perspective, I think after the gfc, we were at roughly a third. And when I started analyzing the industry more than 30 years ago, it was in the single digits, high single digits. So cost of capital is about anywhere from 500 to 1000 basis points better for public companies. They've got scale advantages, they've got better negotiations with vendors in terms of getting better deals and rebates. So there's real advantages to just scale and cost of capital. And those advantages have given them much higher market share in individual markets. Is it good or bad for the industry? I think it's not good for the private builders that are trying to make a living. They're having a difficult time keeping up with the significant incentives that builders are offering in the public arena. But in terms of the consumer, if you're a buyer in the market, the public builders are trying to create affordability and I think that's a good thing for the consumer.
- [28:40]
B
And yet the public. I, you know, I had Ryan on from Pool T, thanks to you, back in the spring and pointed out to him that they're, you know, in, in 2005, Pulte delivered 45,000 new homes. In 2024, they delivered slightly over 30,000 new homes. And my, my question to him at the time, Ivy, was, you know, isn't there a market there for you to get back to delivering 45,000, 50,000 new homes a year? And the response he gave me was we, we like our size right now, we like the scale that we're at and, and, and they also like the profitability they're generating on building 30,000 homes versus 45,000 homes. So if the, if the publics are doing really well, ROEs are doing well, EPS growth is fine at their current scale, who's going to fill the void as it relates to the need for single family and then we can get to multifamily in a moment. But single family housing, if, if the public's dominate the market so much and the ability for someone to be an upstart and get into it to create new supply isn't there. And this gets into where you, I saw Urban Institute came out with a, with a study recently that showed that we really only have a 2 million housing shortage in America, which you are more inclined to believe that it's that lower number than. There are plenty of people out there who are saying that we're, we're, we're missing 4 to 5 million homes. @ the end of the day, I don't care whether it's 1, 2, 3 or 5. Bottom line is we have a, a housing shortage. We had just last, no, two weeks ago we had Tucker Carlson, Laura Ingram and Elizabeth Warren all on national television, all three of them saying we have a housing crisis in America. So when you have people across the spectrum from that diverse of Tucker Carlson to Laura Ingram, to Elizabeth Warren, all saying we have a housing crisis in America because housing has become unaffordable. And yet we have the large publics who are making very good money and seemingly not having an incentive to increase production. Where's it come from?
- [30:53]
C
Well, let's back up a moment because where Pulte is and where the builders are, overall, their earnings are down a lot. Their gross margins are down on average 600 to 800 basis points, which is probably, with the exception of GFC, the worst margin performance we've seen. So they're struggling right now. Their backlogs are down, their orders are down, their earnings are down, their roes are down. So looking at what their plans for growth right now might not be the best indication of future plans. You know, Dr. Horton said they're going to do 80,000, maybe 90,000, depending on what the market dynamics are. So they're still going to try to grow overall. Maybe Pulte's a little bit more unique, but I would say that the shortage that everyone likes to talk about, which to me it's rhetoric, because at the end of the day, we have a shortage of affordable housing. So we can talk about shortages till we're blue in the face, but the real impediments to providing affordable housing start with land costs and regulatory pressures. And until we adjust and figure out how to build houses at a more affordable price point, we're going to have young adults. Our kids maybe might be a little bit better off than other people's families because we have affluence that we can help our children. The wealth transfer is helping definitely many families, but other families don't have that benefit. So we have young adults living with their families and dual households that are going to continue to be elevated relative to normal. Go back to the 1980s, 1990s, 15% of those 20 to 39 year olds lived with their parents. Now we're at 21 plus percent. And why is that? Because they can't decouple from their families because they don't have either the down payment or their credit quality or they just don't have the money to buy. So I think that whether It's a million, 2 million, 3 million, 4 million, I don't really care. We're not providing affordable housing.
- [32:43]
B
But so then on that. And by the way, I listened to the all in podcast yesterday in the car from two weeks ago and they used a stat, so I don't know where it came from, but they said their stat was that only 12% of 30 year olds in America today, 12% are married and own a home. And they were basically saying that both the institution of marriage as well as homeownership under significant pressure. You and I both know the, the stat that the average age today in America for a first time home buyer has moved up to 38 years old. So that foots a little bit with their data as it relates to only 12% of 30 year olds in America married and home own a home. But if I go back to it, if, if, if, if Tucker Carlson, Laura Ingram and Elizabeth Warren are all sitting there saying we have a housing affordability crisis in America and if people can't aspire to buy a home and create a family using what Tucker Carlson said, you know, the American dream is lost. So you hear that, you hear that we have an affordability problem, not necessarily a manufacturing, manufacturing problem. So what can we do? What is the alternative right now as it relates to trying to bring down the cost of housing? Because this is a real crisis if you will. There's no incentive we can give to a Toll Brothers or to a Lennar to go increase the manufacturing of their housing product. We can't wave a wand over local regulation as it relates to NIMBYism and land entitlement. And so what are the levers we can pull other than potentially rates coming down. But as you very clearly said, even with a new Fed chair and even with 50 to 100 basis points of cuts, the actual rate that drives housing isn't, is unlikely to move very far right.
- [34:39]
C
I don't have a good answer for you. I know that there are regulatory changes that could be made that would in fact help the. We've talked about the impact fees that are pushed to developers that are significant headwinds for providing affordable housing. Builders are trying to decontent homes, reduce the SKUs in homes. I think that it's really the local market that dictate it. More builders are building purposely built homes for rent. So people that want a single family experience, that can't afford the down payment, that can't own a home today, they can at least rent a single family home. That to me is not a solution however, because you can't create wealth over a lifetime by renting. So I don't have the answer. But I think that the builders at least by, you know, Lennar, Stuart Miller talking with Stuart, they want to drive improvement in affordability by continuing to reduce price. So whether it's higher density, building more homes per acre, there's going further out Sprawling further out to markets where I jokingly call it, where the cows don't even want to live. They're doing that. And land is much more affordable, so people have to drive to qualify. But eventually rates are the key element. And, you know, you can't. How are we going to get the other elements of the cost of housing down? Cost of materials we just talked about, you know, builders are fighting back, but the material costs continue to move higher. Land costs are stubbornly high. So it really has a lot more, I think, ammunition at the regulatory level to make changes. And maybe the federal government can help tax your governors, go after the governors of the states and take away, like Trump's trying to do with universities, take money away from states that are not providing affordable housing. Because I bet you the government would do a lot in each state to go to that local level and say, you got to stop this, because I just lost this much funding. So I think there are some big sticks that can work, but it's got to come from the federal level, and they have to go to the state level. That goes trickle down to those local markets.
- [36:42]
B
My understanding from a conversation I had yesterday is that the Trump administration is working on an executive order to try and do many of the things that you just talked about as it relates to trying to, if you will, when I use the term, loosen up regulation. That's not. That's not, I should say, if you will, deregulate at the state and local level to try and make it so you can get land entitlement and try and get more affordability at the local level, which has obviously been a challenge. Ivy Day on Monday, the Census Bureau came out. This is related to that. On some new housing construction data that showed stronger starts in both single family and multifamily. They had total starts at 1.4 million, which beat most expectations by 10 to 15%. And they had multifamily starts at almost half a million, which is super high and conflicts with almost all of the data that I've seen recently. As it relates to what's happening on the multifamily side, as it relates to starts. Two questions on that. Does that data surprise you? And then second of all, it's data that's coming from the federal government. Given everything that's just gone on with the Bureau of Labor Statistics, what's your take on trusting federal data right now?
- [37:59]
C
Well, the start data was surprising to us. We were expecting a pullback. Permits were flat and were down year over year. We're expecting starts to be down 8% this year. And we've been seeing builders pull back on starts given all the spec inventory you alluded to earlier. So we don't really expect whatever blip in the market that might have shown an increase in single family to be sustained. I think that builders are working through inventory and will continue to pull back on starts as long as the market remains challenging as it is right now. On the multifamily side, you know, we hear a lot about, you know, you can't pencil, it doesn't make sense to develop. But the actual individual survey participants that we interact with are starting more development. So on one hand they point to the fact, oh, we don't think starts are going to increase, but they're, but they're individually starting more developments and we hear it from the public REITs too, that they're doing more development. So I wasn't surprised to see the starts on multifamily increase. I think everybody's trying to get in before the supply is all worked through. So, you know, they don't want to be the last guy that doesn't have any availability for product. So that doesn't surprise me. But the single family side did surprise us and we don't think it will be sustained.
- [39:09]
B
Talk that through. As it relates to multifamily, clearly, the REIT performance that I talked about at the top of our discussion, they have clearly disappointed this year and one of the main reasons their stocks are down so much is because of the rent, the lack of rent increases that many people had projected the REITs would be benefiting from in Q2 of 2025. There is clearly, if you look at any slide as it relates to deliveries we have, we've had an amazing absorption in the multifamily market. Q2 had record absorption and on an annualized basis, over 750,000 units have been absorbed, which was a, was way, way above what most people had projected. As it relates to absorption of the new supply that it came in, came online in 24 into 25 and yet, and we're over 96% occupied in the public REITs and yet we haven't seen the rental increases that many people had projected. What's your take as we roll forward from here, Ivy, as it relates to the supply burn off, the new development coming online and the ability for multifamily owners to be able to push rents, if you will.
- [40:22]
C
Well, you know, given the two QQ results that were disappointing relative to your point about the re acceleration of rent growth, I think our view is that you know it's coming, it's just a matter it's slower than anticipated. We actually upgraded the space after the Week 2Q results. Still believing that longer term over the Next, call it 6 to 12 months, we're going to work through that. Supply completions fell pretty substantially with the census data release and backlog is actually up now, which has not been the case for quite some time. So I think that, you know, the southwest and southeastern markets, Texas markets, those markets where supply is still elevated, lease up competition is still pretty challenging. We weren't surprised that rents weren't reaccelerating. That's one of the reasons we remain cautious and we felt the REITs were priced for perfection. So I think it's going to take time. But our rent forecast for the multifamily is steady, still steadily improving between 25 to 27, getting back to trend line by 27. So it's just taking longer, but they'll get there. And there are markets that are not laden with supply that are seeing pretty substantial rent increases, you know, in, you know, high single digits in some markets. So once that supply is worked through, given your point about absorptions, I think we're going to have inflationary pressure from rents again.
- [41:41]
B
You'd mentioned in your discussion on single family that the, you know, the great Covid markets are now oversupplied and hurting and that the, you know, the bad Covid markets, if you will, where people moved out of are having sort of a heyday and have limited supply and therefore the ability to both sell existing inventory and sell it at a good price point. Is your view, does that mirror the multifamily market ivy or are there differences between single family and multifamily as it relates to good Covid markets versus post Covid markets?
- [42:15]
C
I think it's the same pretty much. I mean generally speaking and you know, one area that we haven't spoken about is SFR because the single family rental public companies are, you know, the only two that are out there, American Home for Rent and Invitation Homes. We're seeing a little bit more pressure on rents because there's a lot more product on the market because more built for rent in those same Covid winning markets are now putting pressure on their ability to lease at the rates that they were hoping to underwrite. So I do think that Covid, multifamily, single family rental and for sale are all kind of experiencing the same dynamics. So whether you're in the Northeast or the Midwest or in some of the California markets, you're seeing Pretty good Pacific Northwest where builders are not as concentrated. Those are the markets that are seeing the best rent performance and for sale performance.
- [43:05]
B
It shocks me that SFR saw negative rent growth in Q2 just given the dynamics of the market that, that just if you sat there and said to me, okay, you've got pressure on single family sales because of X, Y and Z and you've got a multifamily market that is oversupplied, I'd sit there and say the consumer wants to be in a single family detached home and if they can't afford the mortgage, they're going to move into sfr. And yet we're seeing negative growth there. That's all just a supply and demand issue as it relates to oversupply in those markets. Ivy?
- [43:38]
C
I think so. I think if you talk to single family rental operators that are, you know, on the same dynamics as the public, companies are experiencing the same things. There's thousands of homes in many of these MSAs that are built for rent that they're competing with to get lease up. So it's really not any different than multifamily. And rental rates. Even though they're nowhere near as challenged on affordability, there's still rent to income are elevated. So I think, you know, it goes back to the consumers kind of tapped out, but it also is a lot more choices out there now. If you were to meet with, let's say a broker in the Midwest, they would say we're, you know, we're holding in there or we're seeing some modest growth, but they're still frustrated because they don't have enough inventory. Where someone would say I want to sell my home because I'm an empty nester, but where am I going to go? So it's not, I don't want to paint the picture that the rest of the country is doing great. It's still challenging because in those markets there's still a lack of available product and that's why you're seeing HPA still rising and rent still rising. So if you're the beneficiary of owning a home and prices are still going up or you're a landlord and rents are still going up in those markets, it's great. But the consumer in those markets are definitely the losers in those situations.
- [44:54]
B
When you say the consumer's tapped out, I remember Barry Sternlich went to the Saudi Arabian investor conference just about two years ago, September of 2023 and sat there and said US consumer is completely tapped out. We're watching credit card data and credit card defaults are starting to go up and we're going to see them spike and the US consumer is going to peter out. And as subsequent to that, I, as any good friend would do, have sent Barry pretty much on a quarterly basis an update on where the consumer defaults are and consumer credit defaults are. And the while they have gone up since immediately after the pandemic, they are actually back to normalized levels as it relates to both net charge offs and delinquency rates for all the major credit card issuers. And so we actually haven't seen the US consumer, if you will, hit the wall. And yet at the same time, you're very clear in saying if the consumer was doing great, we'd have more home sales, we'd have more Home Depot sales. And you, you watch the entire ecosystem. What's your, what's your sense as it relates to. We've gotten the inflationary pressures out of the market. Consumer credit is flowing very freely right now. You have the banks that are fully capitalized and extending credit both through mortgages as well as through credit cards. And so do you think that we have a, you know, do you think that we have some type of not cliff event, but do you think that the consumer is about to hit the wall or do you think we kind of bump along here? What's your, what's your view of the consumer right now?
- [46:33]
C
Well, you know, we go, we went back in our last housing summit, we looked at inflationary data going back to 2000, and when you look at overall household income grew from 2000 through last year by 109%. And then you look at all other non discretionary categories, whether it be health care, utilities, education, those were all up significantly more than that. The only thing was food and food services was below where income was. So I think where you say inflation's no longer an issue, you know, I think, you know, my sister who lives paycheck to paycheck is saying grocery prices haven't come down. Maybe they're not going up anymore, but they're not coming down. And when you look at mortgage delinquency data for Ginnie Mae, which are our first time buyer delinquency rates are rising much faster and higher than prior vintages. So I think we're couple that with those that had a student loan. There's 45 million that have a student had student loans that were no longer needed to be paid, federal student loans. And now those loans, they can't be extinguished through bankruptcy. And if you don't pay those student loans, your credit now is being negatively impacted. The credit bureau agencies are getting notified in 25 for the first time. And starting in September, wages are going to be garnished. So I think that's going to have a bigger impact. It might have a bigger impact on those that are in rental housing than are in ownership positions because those owners at least have equity and other means they can borrow against their home, assuming they didn't buy last year. So, you know, whether I say the consumer's tapped out, I'm really referring to more call it that subprime borrower that, you know, lower end income borrower that is living paycheck to paycheck. And I think whether the credit data that we'll be talking about and showing in more detail at our housing summit is directionally going the wrong way for all categories, whether it's back to more normalized levels versus where it was during, you know, Covid, when we were throwing stimulus money and people were out spending and having a ball. We're now on the flip side of that. And I just don't know where the magnitude of that flat toes, but it doesn't look good. Especially the student loan crisis that I think we're going to have.
- [48:40]
B
The student loan crisis, Ivy, most of those loans are guaranteed by the parents, not the actual student. So as that kind of ripples through it, is that more of an impact to the baby boom generation because the parents are the ones who had basically signed on the dotted line there versus the actual student? And, and therefore wouldn't that there's this massive wealth transfer that everyone's talking about? How there's. I think the number I last heard was $90 trillion of baby boom wealth that's going to move from that generation to the next generation over the next decade. And as a result of that, is that, is that more of an impact on that generation or is it actually the person who got out of college five years ago still has their student loans, isn't his renting in wherever and it's actually going to hit him or her?
- [49:33]
C
It's really interesting because I don't have the detail in front of me. But first on student loan debt, it's really across the age spectrum. We have people that are in their 60s that are in default. So it's not just the students who just graduated over the last several years. But we'll give you more detail on that once we go through it. But also what's interesting is that 70% of the loans that are in default are people that didn't finish their higher education. And I think those people are more likely not to be homeowners based on just that data alone. But I do think that whether the parent guaranteed it or not, whether the wealth transfer can assumingly help offset some of those pressures, I would think that would have already happened. I know that it used to be that wealth transfers happen after people were no longer with us and they aged out. But that wealth transfer happens every day now for you and I and paying for our kids to either rent an apartment if they're moving to New York City, I mean, what young adult can graduate college and go rent an apartment in any major city in this country? So without parents help or substantial roommates, I think those headwinds aren't going to go away. And student loan debt in default is just another element of headwind that I don't think they've had to deal with today, whether they're a 25 year old or they're a 62 year old. And I think we're going to feel that. And consumer spending will probably be impacted. And we look at things like you mentioned furniture, we didn't talk about that. But when you look at the various furniture retailers out there, they saw a nice bounce. The stock saw a significant improvement since Liberation Day and they've come off their lows. And we still see Restoration Hardware seeing double digit growth and companies like Wayfair that are performing pretty well. So you'd say, well, if the consumers tapped out, how are we seeing Wayfair doing well? So I think there's companies that are gaining share and others that are under pressure. So it's not today, maybe the word tapped out is too strong, but I think we're going in that direction and that's concerning.
- [51:31]
B
Yeah. Talk for a moment about immigration as we look at the two big major policies of the Trump administration and there have been so many that to call two major ones, I mean, there's so much going on. But anyway, of the two that, that we thought were going to impact the housing industry significantly was tariffs and immigration. Have you seen immigration policy, the crackdown on the border impacting either for sale or for rent housing?
- [51:58]
C
Not at all. We've heard about raids happening at job sites and typically that they go looking for criminals and they'd go after one or two people and that would scatter for a day or two, everyone that works on the job site. And that would really piss off the builders that are trying to get their development done or go vertical. But really there hasn't been an impact. And in fact, Dr. Horton just was talking about they're getting relief on labor costs because it's so challenging on the new home side of the equation that there's more competition for that work. So they have more people bidding for jobs and there's actually relief on the labor side for the builders.
- [52:40]
B
That's so counterintuitive.
- [52:42]
C
Yeah, I know we've been waiting for it, but it hasn't, hasn't come to fruition.
- [52:48]
B
And as it relates to building products, and you all cover building products as well, sort of back to the comment that your sister said of, well, the cost of groceries is not going up at ridiculous levels. They're still elevated as it relates to building products and the major components, timber and cement and things of that nature. That is all normalized, but at a higher base level.
- [53:20]
C
Well, depending on the category. Certain categories are realizing price, but overall we are seeing an upward trajectory on price realization for the building product companies that we follow and for those that we think we survey so that their realization, somebody's getting hit with that. And that was where I go back to the Home Depots of the world where they're starting to pass it through to their consumer because they're eating it from their vendors. And so we are seeing more pressure, but it hasn't, hasn't resulted in anything material because their margins are still under pressure. So they, they, they've had raw material prices that are coming down, transportation costs are coming down. And so they've actually seen some margin improvement and now they're, they're chasing price to get even further margin improvement.
- [54:06]
B
And, and on the home improvement sector, Ivy, one of the, one of the stats that, that, that Linneman tracks is as an indicator, a leading indicator of home sales is an a tick up in home improvement sales which then leads to people sort of putting a fresh can of paint on their home to then put it onto the market. And I actually took issue with that and said to Peter, well, you know, given the number of people who have the lock in effect on their mortgages, which you and I just talked about, isn't that home improvement actually just clean, you know, making improvements because they're going to be there for another five or 10 years and not necessarily because they're trying to get it ready for sale, what's your take on, on that? On that is either a leading indicator that people are going to start putting more homes on the market or actually they are, you know, souping them up because they're going to be there for another five or 10 years. Because that, you know, 3.5% mortgage is keeping them locked into that home.
- [55:08]
C
I probably would say the latter. I wouldn't see it as a leading economic indicator for future sales. I think that people list their homes, then they start staging it because their realtor says, look, you've got to clean this house up, you've got to fix this, you got to pay that. So it's almost more within a month or two that they'll do the quick paint. They'll, you know, maybe change some flooring or stage the house. But usually pretty close to when they're listing or even they'll list and then they'll be told the reason you didn't get the price you wanted is you need to fix your house up. And then they'll do it while it's listed. But more people are doing projects that are going to create value for the home and their tent. They're, they're staying longer. The one thing we didn't talk about, Willie, is that we should, is that starting in 2030, we're going to see what politely, best way to politely say it is a lot more aging out, a lot more inventory that's going to come on the market. And I've been asked the question, who are going to buy those homes? If anything there's, you know, tremendous amount of product that will come to market. And if it's still not affordable, what's going to happen to pricing if all this product starts hitting the market and no one's there to buy it? Those are questions that I get a lot. And those are, you know, estate sales. You'll, you know, on my street in Cleveland, there's two right now, estate sales. And you know, families are selling and they're stubbornly saying, I want more. And the realtors are saying, you don't understand the market. And I'm like, you know, show them our research. You know, so that's another headwind we need to start to. We're not that far away from 2030.
- [56:36]
B
No. Or not. And I would only add to that. Flipping over to the commercial side, one of the things that I've been very focused on recently is that because of where the yield curve is, all of our lending right now is five year paper. And historically we've been, you know, we, we. The average term in the past, well, for as long as I've been in this industry for over 20 years has been seven and 10 year mortgages and predominantly 10 year mortgages. And we're right now almost exclusively doing five year mortgages and what we're, what we're then generating right now is a refi wa for 2029 and 2030 that is, is building by the day because all the 2019 and 2020 mortgages are still sitting out there with a 10 year term. And now we're adding on top of that tons of five year paper. And so if you, if you look at what just in the multifamily space, Fannie and Freddie Right now, 2029, they have $138 billion of their own books that refi in 2029. Well, if they keep adding on five year paper in 29 and 30, you're going to get so much refi that they won't even under today's current lending capacity that both Fannie and Freddie have. And they likely will go private between now and then. And whether they have annual allocations as far as what they can lend on multifamily or not in the future is anyone's guess right now. But without a change to it, they will barely have the ability in their annual allocations as it relates to lending capacity to be able to refi their own portfolios, much less go out and do something else. So that, that refi wave is, is building quickly, given everyone borrowing at five years right now rather than 10 years as we've historically been lending.
- [58:16]
C
Yeah, well, hopefully it'd be good for Walker Dunlop's business.
- [58:21]
B
That's it. You know, I mean, look, that's two bites at the apple over five years rather than one bite at the apple over 10 years every five years. But you know, we shall see Two final things for you, Ivy. The first one is, given the overall landscape, where is AI either having or going to have the biggest impact? And then the second and final question to you is we've talked about all the various sectors in the sort of housing industry. If you had to put a dollar in one of those today, which one are you going to, which one do you put the dollar on?
- [58:58]
C
Well, first question again, tell me quickly because I was anticipating your second question. So what was the first question, Anne?
- [59:05]
B
Yeah, first one was AI where may have the biggest impact? Is it on the brokerage business? Is it on the lending business? Is it on the manufacturing business? Who has, who has either already started to implement AI or has the opportunity to implement AI that could dramatically change one of the verticals in the housing industry?
- [59:24]
C
Well, I think most companies are right now exploring how to utilize AI to create efficiencies. And probably you see it, whether it's customer service, sales where they can utilize AI bots and take humans out of the equation. And they don't want to say this on conference calls that, you know, they're anticipating headcount reductions, but what you hear a lot sort of on that customer service, sales associates. That's where you'll see the improved efficiencies or reduction in headcount. I think they're exploring it. The mortgage Rocket is a great example of a company that's really utilizing AI, and I think you'll see more from them. I don't think the entire mortgage industry is benefiting as much as Rocket, though. I think Rocket is leaps ahead of everyone else because they've been making investments. I think companies like Lennar, they've talked a lot about their opportunities with AI and even finding ways going backward into land development and different areas to find ways, uniformity and costs that they never could analyze before. So I think there'll be opportunities, but I'm not so sure that we'll see anything manifest itself within the next year or two. It goes so fast, I could be wrong, but I worry more in our ecosystem, what's going to happen to those people that are displaced if there are substantial headcount reductions and where are they going to go? And the answers I get offline are like, well, we reinvent. We've always done that. The industrial revolution, we'll reinvent ourselves. So a lot of recent AI podcasts and such and people that I'm sure you've spoken with that have some theories, but the home builders tend to be. The housing market tend to be the last. A lot of builders will say, or building product companies like, I don't need to be the leader. I'll be a follower here. So those that tend to be more of the leaders, like Lennar, I think, you know, there's others that are kind of following suit or being a little quieter about it. It's going to be on the front line. For those that are interacting with consumers and dealing with, whether a digital experience or they're coming in doing right now virtual tours, how do you eliminate. Headcount will be the biggest efficiency that they create, I think.
- [61:32]
B
And then finally, across the covered sectors, where are you putting your $1?
- [61:39]
C
I think you're going to be surprised, but I think that we would probably lean to multifamily right now. I think there's a lot more opportunities for multifamily operators, developers to accelerate rent increases once the supply is really worked through. Assuming we don't see continued skyrocketing supply on the start side. But you know, I think affordability for the first time buyer for builders is going to remain stretched. I don't think I gave this stat, but if you were to buy the median priced home with the non supervisory employees single income and you had to pay property taxes, homeowner's insurance, principal interest to buy that medium price tone would be 60% of your income single income. And that is the highest it's been since the early 80s. So we need to see that dramatically improve before we get the for sale market for at least the first time buyer market really getting any traction again. So I'd probably lean to the rental market.
- [62:35]
B
Yeah. Hard to believe, Ivy, that it was five years ago almost right now that you and I did our first one of these. Your insights are.
- [62:44]
C
I remember you called me. It was like March of 20. You're like, I'm starting this webcast and look at you now. It's incredible. How many webcasts have you done since that first one in March?
- [62:53]
B
Oh, I don't know. Someone will tell me. 250 some odd, I don't know, 18 million views or something. It's, it's, it's, it's. But you know what if I take all the ones that you've been on, you know, you're, you're, you're well over a million of those. So it's just great.
- [63:07]
C
Appreciate it.
- [63:08]
B
Thanks for everything.
- [63:09]
C
Knowledge in my space. I'm. I don't know if you got like a cheat sheet over there, but I'm very impressed.
- [63:15]
B
You know, I will say that Mark from your team and Tristan from our overall market analytics team were very helpful in pulling together a bunch of data for me on this to give me some ideas to talk to you about. So many thanks to Tristan and to Mark for that. Thank you, Ivy, for spending time with me today and thank you to everyone who joined us and I hope everyone has a great day.
- [63:38]
C
Take care. Thank you.
- [63:39]
B
Thanks, Ivy.
- [63:58]
C
Sam.