Webcast transcript
Willy Walker: Thank you, Susan, and good morning and good afternoon to everybody and thank you for joining us on another Walker Webcast. It’s a glorious day here in Denver and it's a real honor to have Diana and Ivy joining me. And with over 5,500 people pre-registering for this webcast, I know that there is a lot of interest in what they both have to say.
Many of you joined us last week for my discussion with Brendan Wallace of Fifth Wall, and Casey Berman of Camber Creek, two of the leading property technology venture capital funds in the United States. As Susan just said, if you missed it, you can go to our YouTube channel or listen to it on the podcast, Driven by Insight. Casey and I discussed the sale of a Camber Creek portfolio company, Latch, to the Tishman Speyer SPAC. And just yesterday, a Fifth Wall portfolio company, States Title, was sold to Capitol Investment Corporation SPAC. Both Latch and States Title are now worth over a billion dollars each and given the growth and the PropTech space and amount of capital being raised by SPACs I don't think they'll be the last.
We announced this past weekend an exciting initiative, where Walker & Dunlop is participating with several other major firms in the commercial real estate space to focus on increased diversity in our industry. I was just this morning participating in the JP Morgan Chief Executive Officers Conference and Bryan Stevenson, founder of the Equal Justice Initiative, spoke emotionally and insightfully about what must change in our country to make us a better and more just society. If any of you have not watched Bryan's Ted Talk from eight years ago, I would highly recommend you take the 25 minutes to watch it. His words and his leadership on these topics are as needed today as they were when he first gave that speech, eight years ago.
Finally, I've had a number of firsts this past week that I thought I’d just bring up. The first is that I had a meeting in our office with three colleagues where we did a whiteboard session. And I will just tell you that it was the most engaging meeting I’ve had in months. And I am still a firm believer that we will get back to the office soon, and that [the] office is where culture and creativity flourish, and from having done that whiteboard session and seeing how creative a session it was, it really did make me realize the limitations of Zoom meetings. I also had the former Chancellor of the University of Denver, who is 89 years-old, over for dinner this week. Without a mask. And he is vaccinated, obviously, but he was the first senior citizen I have seen without a mask on in almost a year's time. And it was wonderful to sit at a table and be able to interact with somebody over 65 -- 89 years-old -- and be able to do that. And then the final is, I had a client lunch yesterday here in Denver at the Capital Grille, and it was fantastic for a colleague and I to go to lunch with one of our big clients, and be able to sit around a table and have a lunch. And so, while now is not the time in any way for any of us to think the pandemic is over, or to drop our guard, the world is clearly moving closer and closer to some sense of normalcy every day, and it's really exciting to be seeing some of these early signs of getting back to that.
Okay now to my two fantastic guests. Diana Olick is an Emmy Award- winning journalist currently serving as CNBC’s real estate correspondent, across all platforms. She has been with CNBC since 2002 and covered the housing boom and bust leading up to the Great Financial Crisis. Prior to CNBC, Diana spent seven years as a correspondent for CBS, where she covered politics and the judiciary, including the Supreme Court during Bush V Gore. She also covered the Oklahoma City Bomber trial of Terry Nichols, which actually took place literally out my window here in Denver. And the Jon Benet Ramsey murder mystery that took place up the road from me in Boulder. Now Diana lives in Washington, DC and so every morning that I watch her on CNBC, I get to see my old neighborhood back in DC, which is fantastic. She lives in DC with her husband and has college-aged twins. Diana went to Columbia University undergrad and has a master’s from Northwestern University School of Journalism.
Ivy Zelman, no stranger to the Walker Webcast and many of our listeners, is the founder and CEO of Zelman Associates, one of the most highly respected research firms covering the housing industry. Ivy began her career on Wall Street as one of the most highly ranked analysts at Solomon Brothers, and then Credit Suisse. She left Credit Suisse to found Zelman in 2007 and she and her team have received Institutional Investors number #1 place ranking from 2010 to 2013. And in 2020 Ivy was named as one of Barons Top 100 Women in Finance. Ivy graduated from George Mason University and lives in Cleveland with her husband and three children.
So first, welcome to you both. Wonderful to see you and I’m deeply thankful that you're taking the time to join me today. I listened to a Tim Ferriss podcast yesterday with Michael Phelps and what I thought was going to be a discussion on swimming and training turned into a deep dive on mental health and Phelps's personal journey. And so rather than starting today's discussion on home sale rates and CAP rates, which we will clearly get to, I wanted to take a moment to ask the two of you what it was like being women in male-dominated industries when you started your careers. Diana, how hard was it to establish a career as a female reporter and journalist back in the early 1990s?
Diana Olick: Well, first of all Willy, thanks so much for having me. This is a great honor to be on the webcast and of course, to be with Ivy Zelman. Ivy, whether you know it or not, you taught me the bulk of what I know about subprime mortgages and subprime mortgage backed securities. We've known each other for years, so it's great to be here with you. To answer your question, Willy, I would say when I started many, many years ago in local news, it was not that hard coming up as a woman, because at local news stations that's where women were. A lot of young women starting, coming up through the ranks. So, I didn't have any issues there. I did come up pretty quickly, and in three years got the big network job at CBS News. That was a bastion of male-dominated journalism and very conservative. And I'll just say that I'm shocked to this day that I lasted there seven years. So, I'll just leave it at that and move on to CNBC, which hired me 18 years ago. I had just had premature twins. I had big limitations on my time, travel abilities, they could not have been more accommodating. And also very nurturing. And I will say this and it's not just because it's a pandemic and I need a job, but CNBC is the kind of place that really doesn't care whether you're a man or a woman, or race, gender, anything. They are, of course, into diversity, but they really care most if you're smart; you can tell a good story; you can find a good story; you can break news that moves markets; and you have great contacts like Willy Walker. So, I mean, I know that there is definitely a lot of discrimination in the news business. We've seen it. I personally saw it briefly, and then have not seen it really at all, at least where I work, not necessarily out in the field, but where I work at CNBC, not a factor. And I’m thankful for that.
Willy Walker: So, Ivy, you had to be one of the few female analysts in the Solomon Brothers research group when you joined Solly. Take us back to them.
Ivy Zelman: Sure. And thank you again for having us back -- having myself back -- on the show. I would just say that I go back, like Diana, many, many years. When I think back to the days I started at Solomon, I actually started investment banking, and that was where I was one of seventy analysts in the two-year program that were… really, I was one of three women out of seventy. And it was not intimidating for me, relative to being a woman, I was intimidated because most of the, my fellow peers, were from Ivy League schools. So I never even thought about being a woman. What I needed to do was to outperform and be ahead of the pack on my overall capabilities. And so as I progressed on my way up in Solomon, and moved into research, I, like Diana, I really didn't find myself running into issues being a woman. Although there was, you know at times, there's no question, you know, locker room chatting. But I was I grew up one of three girls, a tomboy, I was a pretty tough chick, so I didn't have any trouble fitting in and being able to kid around with guys and hang out with them. But I would say that it was more about just your performance that mattered, and I think that that's what really counted. And at the end of the day, it never held me back.
Willy Walker: And Ivy, you now find yourself, though given your business and the sales of your research to still a male-dominated industry as it relates to the investments world, you find yourself, I’m assuming, in many rooms where you are the only woman in the room. I've actually been in meetings with you…well, there were two last time you and I got together. But you're typically one of the few women in the room. What advice would you give to both women and minorities, who find themselves as the only “one” in a room, and how you navigate that type of a situation?
Ivy Zelman: Well, I think a lot of it has to do with self-confidence and really owning it, and just recognizing that, you know, there's an opportunity to really learn from the people around you. And I've talked to many young women. I do a lot of work with college students -- paying it forward --and just chatting with young ladies about what they're doing at their internships, or the jobs that they had. And so many times I'll ask them, “So, how many people have you spoken with while you're working at this internship and learned about their overall experience and what their thoughts are about working there?” And they'll be like, “Oh I don't want to / I haven't asked anybody anything.” So, my response is, “Are you kidding?” You've got to talk to people. Ask them questions and really hear their stories. The more you get them talking about themselves, the more comfortable they'll be with you and likely, the more highly they'll think of you. So really that ability to ask questions and to also roll with the punches. You know when you hear guys talking about sports, you know, I jump right in. You know, my husband's a Buckeye and I could talk football, baseball, so, having the sports lingo really helps. But not being afraid to speak up. And when I was at Solomon in equity research, sometimes I heard people saying, you know, “She's kind of like, really aggressive.” And a woman being aggressive is another word for being a bitch. But I think that I'd like to say I was very assertive and not afraid to speak up, and I think you just have to recognize that your capabilities and your performance is really what matters and not be afraid to let your voice be heard.
Diana Olick: And I would echo what Ivy says, is that there are times when people will call you out as being too aggressive simply because you're female. And I think what you have to master is the art of being mean and nice all at the same time. Which is know your stuff. Be on top of what you're doing. Be incredibly aggressive, but you sometimes have to be just a little bit nicer, in order to get your way. Whereas, men can come barreling through and bullying through a lot of the time, and nobody cares. That's just the way they are. But I would also echo that to find great mentors. You know, I found one in the home-building business. Cheryl Palmer is the only female CEO of a publicly traded homebuilder. And she is a fantastic CEO, and on so many levels a great mentor. And I would just say for young women also coming up in the business, find those great mentors who have come up through the ranks and who have sat at the table, you know. She says she's at board meetings, or where she's the only woman there, or meetings with other builders, and they expect her to pick up the dishes afterwards. And she'll turn around and say, “Hey! Come back here. Pick up your own stuff. I'm not here to do it.” And that's the kind of thing that really sets the tone and tells you, you know she means business. She's smart. She deserves to be at the table, not to clear it.
Willy Walker: So, I want to dive into the markets here. Before I do, Ivy, given that you went to Solomon Brothers and Michael Lewis wrote Liars Poker in 1989, which sort of told you the environment you were going to be in for the next decade. And then he wrote The Big Short in 2000 -- and whatever it was -- 2007, that talked about the crash of the housing crisis. Seems like Michael Lewis has been very influential in your career and giving you a little bit of heads-up about what was coming. Are you as big a fan of Michael Lewis's as I would expect you to be, given how much of his writing has been around your career?
Ivy Zelman: Absolutely. And reading Liars Poker was a prerequisite to interviewing at Solomon. So, you know, it was clear that I was coming into a very intense environment. And he helped me prepare for that. I had the opportunity during the Great Financial Crisis to actually share the stage with Michael where I was in a fireside chat as the moderator after he published The Big Short. And I will just tell you that he is a phenomenal guy. He's very humble, down to earth. And he does an incredible amount of research on any of the books that -- as we all know and have enjoyed -- so I'm a huge fan. And I would say that he's been a big influence on a lot of what the work that I do and the approach that I take. So, thanks, Michael.
Willy Walker: So, Diana, I think we need to back up to a little over a year ago to kind of set the stage for what happened in housing in 2020 during the pandemic. So, I went back and watched one of your reports. You're at the Mortgage Bankers Association Annual Convention in Austin at the end of 2019. And the numbers didn't look too good from a housing standpoint. The supply was hitting record lows; existing home sales were down 1.8 percent; and you were projecting that home prices would be flat in 2020. Let's start there and sort of wind the clock back to the setup for what happened in 2020, and how we've gotten to where we are today.
Diana Olick: Well, I mean pre-pandemic, everything flipped 180. It was kind of, what we saw in 2019, that fall that you're talking about that, you know, affordability was an issue, mortgage rates were an issue, you were seeing very little supply, especially at the entry-level. The home builders were not stepping up to where we thought demand was, we also weren't seeing the kind of demand we were expecting or had seen in the years before. The numbers were kind of playing that out, that it was set to be kind of a lull in the housing market, and I believe, if I recall, mortgage rates had gone up at the end of that year, at the end of 2019, and then I mean it was just slightly, of course, certainly record lows to begin with, but nobody remembers back when they were 9 percent when I bought my first home. But, we just expected it to be kind of you know, prices always lag sales, we were seeing sales weakening and we expected prices to just kind of, you know, Peter on a little bit, still increasing not any great crash or anything, but just not inflating the way we had seen after the great recession. Then, lo and behold comes Covid, and everything just stalls and stops, and all we could think of was “Oh my God, are we facing you know, a massive foreclosure crisis?” and we started asking the questions “What's going to happen? People can't pay their mortgages; they can't pay their rent!” We had no idea. And then it was just unbelievable what happened in the summer, and I think everybody was caught by surprise and I’ll tell you many of the major homebuilders have told me they were caught by surprise! The lumber cutters were caught by surprise! Everybody expected there to be this stalling of the housing market and it was just entirely the opposite.
Buying was suddenly rampant. Demand was off the charts. People wanted to get out of these dense apartment buildings and not necessarily move to the suburbs. I know there's this great urban-retreat myth out there, but if you look at the numbers, it wasn't necessarily that they wanted to get way out of the city, it's just wanted to get into a bigger house. So, I live in DC. I'm in the district. I'm in the city, but I live in a house. Whereas I don't live downtown in a large condo building or something and that's why I, like my neighborhood was on fire! People wanted homes where they could have more space and more outdoor space, and that's where the builders were suddenly caught, you know, like a deer in the headlights trying to suddenly ramp up production and I don't know where you want me to go from there, but it was a shock.
Willy Walker: I was just going to jump in and just say your beat, if you will, when we went into the pandemic, was sort of covering the Federal response, and you did a lot of reporting on the FHFA whether they were going to set up a facility for services and all that stuff and then, what was the day when all of a sudden, it turned from “Hold it! There's actually an industry that I covered that's about to take off!” Was there some moment you remember of either talking to a CEO or some data report that came in that all of a sudden said, “Hold it! I gotta stop focusing on Washington and start looking at Main Street”?
Diana Olick: Washington happened pretty quickly. They came in with the mortgage bailout pretty quickly. They didn't have all the details, that's what you're talking about, with the servicers, and I remember having Mark Calabria from the FHFA on, live on our air, and I said to him, “Well it's great that you're not making people pay their mortgages and that you're putting this brief hold on that, but what about all these servicers who have to pay their investors?” and he was kind of like, “Um, well you know, we'll figure it out,” and then they did figure it out in the next couple weeks. So that story, I wouldn’t say it went away, but it was kind of not a story anymore because it was in place, they had all the right safeguards, the servicers we're then going to be paid, that was set. Then it just, I’ll tell you it was June and July, you just saw real estate agents, you started to see these stories of New York emptying out. I remember finding a woman who got one of those Carvana cars delivered to her apartment in Brooklyn. She shoved everything she owned into it, and she drove to Nashville, Tennessee where she was from, and bought a house. That was one of the first stories, I think, in June, and we talked to her on the road, I think we zoom interviewed her from her car! I’m not kidding! And, she started saying, “I needed to get out. I love New York, I love it! But I need space; I need a house,” and it was real estate agents around me saying, “Oh my God, I'm getting all this demand!” It was in my mailbox getting these notes from agents, “Do you want to sell your house? Top dollar!” which I’ve gotten some of that before, and then the numbers just took off. The pending home sales numbers took off and then you heard it from the builders, and when you talk after their earnings releases, and you start to hear this just tremendous demand and whether it was online or even “coming to”. There was not a lot of coming to the models, but if everybody wants to do the virtual tours and get in, we just said, “Wait a minute, this is this is massive.”
Ivy Zelman: It's interesting though, just to go back to 2019. What we had been writing about for several years was what we termed “a tale of two markets” because actually, 19 was a fabulous year for production homebuilders, with the exception of the higher price point. So, the tale of two markets is really that you had a disproportionate strength at the entry-level price point because the builders finally, as we talked about Willy, got the memo in 15-16 to build affordable out in the Exurbs. So, this migration out to the suburbs, or we call “extremely suburban” or “Exurb market”, that had been underway for the past decade and the demographics support it, but, when you had Covid come out, it was on steroids. And it wasn't so much the exodus, leaving cities, as much as the lack of inflow into the cities that you typically would get, so it was a double whammy. But the overall market, if you look at the year over year increases in January, February of 20 over 19, the market pre-Covid was up over 45 percent from our proprietary builder survey. So, it was really the higher price point that was seeing more like lack luster activity, which we get into a lot of reasons why, but that's what took off and really starting in late May, early June, which I think is a function of Covid, work from home, historic low rates and I’ll stop there, and let you guys, Willy, jump in.
Willy Walker: No, but Ivy, on that, so when I hear you say that the migration had already begun, if you will, to the Exurbs, does that then say to you that the return to the city is going to be slower than many are projecting?
Ivy Zelman: I think you're going to get a snapback for young adults that went back to live with their parents. I have employees at Zelman that are living in New Jersey and Connecticut, or are living with their parents right now because why pay rent? They don't feel safe. They can't wait to get back to the city. Some of them already have gotten back to the city, but what I would say is that the people that were pulled forward, those married couples or people that just decided, “You know what? We were going to move eventually out to the burbs because you know we're expecting to start a family,” they're not coming back! So, I think that there's going to be a portion of those people that left that will come back, but I don't think the snapback fully is going to be as much of the magnitude that people expect.
Keep in mind that work from home, which is really, the most significant change with respect to a tailwind for the single-family housing market, I believe that’s secular, will allow for migration. Not even to the further out to, let's say the further out away from the job centers because you'll be commuting and in some cases with flexibility from your employer, only one or two days a week. When you also can have people that can cross state lines and the big great American shuffle that really started back in 2010-2020, which I can happily talk more about, that also is on steroids. You know, you think about all these people leaving high-cost states to go to low-cost states, that's really accelerating, and that's something that already had been taking place similar to moving out to the suburbs and Exurbs, but now that great migration... great American shuffle again is on steroids, so, we see more of that coming to fruition. There are going to be winners and losers in the States as it relates to housing turnover and housing transactions.
Willy Walker: Diana, I'm interested to hear your perspective on the on the return to the city, because on the JPMorgan call I was on this morning, Jamie Diamond made the comment that 101 million U.S. workers are still going to a place of work every day-to-day, which if my numbers are correct, there are about 170 million Americans who work. You're only talking about 70 million Americans who are working remotely, and the majority are still going to a place of work. So, if those numbers are correct, and I haven't checked them, that's just from having heard Jamie say that data point this morning, there are already a lot of people who are physically back at work. It just happens to be that the worker, the people that we interact with on this webcast, are mostly living and working remotely and haven't gotten back into it, but you're seeing a much broader swath of the of the market. What's your take on the return to the city?
Diana Olick: Well, I don't think you can say their return to the city when you say which city? I think people are going to return to the cities, they have moved to cities, they're moving to smaller cities. It's what Ivy was talking about, is a great American reshuffle. You see cities like Cleveland where she is, as you know, Pittsburgh, smaller cities, that have great vibrant downtowns that are coming up in the world of tech and other jobs, great job centers. I just did a story on Detroit, that people will start to move to different cities or stay in those cities. It's not necessarily “Do I go back to work or not?” Look, I'm not back at work. Our offices are not open. But they will be at some point, and there will be some jobs that you'll have to get back into. I do think that young people love to be in the cities, I just think that there's a lot of greater options when you talk about San Francisco and New York City. Those are tough cities, but I mean come on, New York has been through a lot. I don't think it's going anywhere! I think, San Francisco, you're going to see a little pullback there, but then you were seeing that before the pandemic as well. We're seeing tech jobs move to Texas in droves and that's why cities like Austin and Dallas are just incredible housing markets, right now. San Antonio even! We were down there a year and a half ago, and the development was just incredible there. Single-family Rental development there was very... So, I think when you say, going back to the cities, you can't say all cities. I think some cities are going to do very well. Smaller, more affordable, more livable cities, less dense cities, are going to be very well. Some of the bigger cities might suffer a bit, but again, I hate to use these vast generalizations of what is America going to do? Where are we going to go? Because, the one thing you can depend on is that you can't depend on anything when it comes to this kind of thing with trends, and we just don't know what that's going to be. I think people will go back to the cities. I do think there will be a shift, though, because there's now not this, “Oh my God, you're working from home, you've got kids at home, you don't want to be around that,” well, we're used to it now. I'm on conference calls every morning. We’re reporters and I hear screaming kids in the background, and nobody cares. So, I do think there is going to be that hybrid and offices already trying to figure out how to deal with that hybrid, whether it's more flexible workspaces. We're doing a story tonight on the WELL Building Seal, the WELL Health Seal, so buildings are trying to be healthier to get people back into them. So, there's going to be some adjustments in the office market, but I don't think you're going to see dead downtowns from here on.
Ivy Zelman: Willy, the number of people working remotely right now, or pre-Covid estimates out there, whether you look at the reserve data, said it was 5 percent. Our data shows roughly 6-7 percent of those in between the ages of 20 and 64 are working from home pre-Covid. So, there are forecasters that are saying that that number could go to 15 percent, 20 percent, so the majority of Americans are still going to be going to an office. But I think that what the implications are for a doubling or tripling of the work from home is very bullish for not only the quality of life for employees, but giving them the opportunity to, you know, have more affordability by driving further out or even crossing state lines and leaving these very high-cost blue states, and maybe going to red states that are more favorable. Not only from a cost perspective but a climate perspective. So, there has been a shift that is going to only be magnified and maybe the cities like New York City and San Francisco, again to Diana’s point, which are really high cost, it's about cost. And think about affordability. People are being forced to leave them. You come to Cleveland, you could buy three times a house in Cleveland for the same cost that you would in California or New York. So, it's cold and it's gray, but people might say, you know, it's affordable, so affordability is going to be a driving factor as well.
Willy Walker: So, on that Ivy, we had 10.4 percent across the board appreciation in single-family housing in the United States in 2020, an incredible year for everybody who's a homeowner. But we enter 2021 with limited inventory, both of existing homes for sale, as well as a new supply, that continues to push the cost of housing up higher and higher, and we have rising mortgage rates right now. What's your outlook for 2021, as it relates to not only price appreciation and whether this market moves away from Americans who want to buy homes, but then also the supply of affordable housing, so that people actually can move where they want to go?
Ivy Zelman: Well, I think that the forecast that we currently have might even be low, but that's contingent on what happens with mortgage rates. So, right now we're forecasting a 6 percent increase in home prices in 2021 on top of the 20 increase of 10 plus percent, and I think what our confidence level is really predicated on is the fact that the inventories in the United States that you already mentioned, are all-time record low. While inventories today are down anywhere 25-30 percent from where they were pre-Covid, pre-Covid inventories were already at a record low, and we're looking at single-family inventories, both new and existing, divided by household, so we can go back for the last 40 years and look at a trend line. So that low level of inventory, where you have more demand than supply, is going to continue to result in higher home prices. Now mortgage rates, I think, assuming you have a pretty substantial increase in rates, you're going to see less discretionary upgrades because there is no question that people are locked in. The biggest concern I’d have is that homeowners in the United States right now, that have a mortgage, every day are refinancing and today, more than 50 percent are at or below a 4 percent mortgage rate. So, think about that. If you're locked into 3 percent and mortgage rates go to 4 percent, you're not going anywhere. So, that's going to be a negative impact to mobility, but what you could see is some of that offset by someone saying, “Well I’m going to leave New York and I’ve got this incredible...” we call them affordability busters where they'll live in New York tri-state area and they'll move to Florida. So, all of a sudden, the rate doesn't matter as much. So, that normal discretionary upgrade might be overcome because of the affordability busters with again, with outbound migration, but I would say that the mortgage market today, theoretically, has a lot of room, because the mortgage originators... we survey over 20 percent of mortgage originators in this country, and because of what you talked about Diana, with respect to forbearance and the complete upheaval in the mortgage market that Covid created, the credit became much more stringent. So on a 0 to 100 scale, we like to do scales through the mortgage survey proprietary work that we do zero, and you can fog a mirror and get a mortgage, like it was back in 2005, 100 - you can't get a mortgage, and 50 is normal. Pre-Covid it was a 54 in our index, so it was pretty much a reasonable, normal level of stringency and underwriting. That shot up to over 64, and currently remains at 62. So, rates should not be just the focus that we have to think about. You can have low rates, in 2010-2011 rates were at all-time record lows, but guess what? The credit box was closed. That index, in 2012, was over 72 on that same 0 to 100, or 79. So, what you have to see is that the lenders, especially because their gain on sale margins are so high, they have a lot of room to reduce their profitability, but still have strong margin. So, the consumer may not feel this backup in the tenure we're starting to see rates move up, but not in tandem with the rate increase on the long end of the curve plus they can ease credit restriction. So, I think we have to be careful not to focus exclusively just on the rates, but we're still constructive and first-time buyers, theoretically, it's still affordable, even at a 4 percent mortgage rate. And Builders, to your point Willy, are going further out to the outer rings. They are building more affordable homes, so I think that segment of the market, assuming they're a renter converting to ownership, can actually do better than maybe the move-up market that is more locked into that low rate or that's not as seemingly moving from a blue state to a red state.
Willy Walker: So Diana on what Ivy's talking about their it's super evident that there isn't enough supply and you reported back in July that housing starts were at 1.5 million units in July, which was a great print, if you will. Is there any concern in your mind or from the people that you're speaking with that there's a huge amount of supply being built right now, and that the cost of inventory, as well as with rates moving up that there might be a glut of supply that people actually can’t afford to buy?
Diana Olick: No, no I would not say glut ever right now. No, and the 1.5 that would be single- and multi-family. What I focus on generally is single-family, not that multifamily is not important, but it's very volatile number and the shortage is in single-family. There is a shortage of Class C multifamily, but I won't get into that. But I think the builders need to just you know pedal to the metal. I know there are a lot of headwinds land, labor, material costs skyrocketing, but when we look at supply, we need more on the low end, we need more entry level. The bulk of the action on the existing home market has been at the high end of the market, if you look at the realtor sales numbers it's all on the high end because that's, the only thing that's for sale. If you have the low-end housing stock, a lot of it was bought by investors and turned into Single-family Rentals. But also, there's just not enough of that supply in existence, and so we need a lot more of this. I don't think, given the demand the demographics, where we are right now, I'm not concerned about the builders building too much, I’m concerned that they're not building enough, and if you ask you know anybody in the industry right now, whether it's realtors on existing homes, or whether it's you know anybody in the business there's just not enough supply.
Willy Walker: I was really surprised in the jobs report this morning and your colleague Steve Leisman was reporting on it that actually construction didn't add jobs in the last market period.
Diana Olick: Because they can't find workers, The jobs are open the jobs are there it's the workers that are not there, they cannot find the skilled labor to fill the jobs. So, everybody says oh, why you know it's a great business. You talk to developers, I know some of them, perhaps you do from the Bozzuto Group. I talked to him all the time about labor and he says look it's it used to be a family business, whether it was multifamily, large construction, or whether it was home builders who are local which is the vast majority of the market, you know, it was a family business where the sons mostly would go into the business and build houses. Kids don't go into home building anymore. They go into tech. They go into other things, and so you're relying very heavily on the immigrant Labor market. They have to be trained. We've done stories about these homebuilder schools in Colorado right where you are, where builders are trying to you know, give free schooling, free training to anyone who will come in and be a home builder if they want to learn, you know HVAC or plumbing or electrical whatever. They just need that so it's not that you know there aren't being jobs added it's there are not workers to fill the many, many open jobs that are there and every homebuilder to a person that I talked to says, you know we're desperate for more Labor.
Willy Walker: Yeah, Ivy talk about the Single-family Rental because it is also going to pull supply out of the for-sale market, and so if you look at, I think it was 355,000 new homes were delivered in January, but I would assume a significant amount of that is not going to be put into the for sale market it is going to go to the for rent market. Talk for a moment about SFR BFR and how that's sort of driving both limited supply on the single-family side and then also bringing some multifamily operators into the single-family world.
Ivy Zelman: A lot to cover there. I think that the SFR industry is at exceptional levels of activity. We have record occupancy. A proprietary survey that we do where right now hovering around 98 percent. There's very strong pricing power across the board on new move ins running at about 6 percent with renewals now starting to pick back up after the initial sort of responsibility reaction to Covid. The operators are raising on renewals kind of in that three-plus percent, so we say markets as strong as 8 percent rent growth in Phoenix so there's just not enough. There’s applications were up at 85 percent in our survey. There's more applicants coming in, so the SFR market they're buying in their portfolios not only existing home where they can, all cash offers… So, to your point Diana, the market is so tight at that price point, not only do you have SFR buyers but you've got I-buyers and you've got fixed and flip buyers, so there's this massive bid and the demand is tremendous and shutting out that first time buyer from getting it directly.
But the Single-family Rental is shifting more to buying new home, which is not Build-for-Rent, they are buying new homes, so Invitation Homes a publicly traded company roughly buys about 10 percent a year in their portfolio are brand-new homes. But what the industry is now shifted to from the census bureau in 2020, 4.4 percent of homes that were built were built purposely for rent. Now that number, we think is going to go up significantly over the next several years because we'll talk to builders that might have built 100 homes for rent and next year it's going to be 1000. Like the magnitude of growth coming in the industry and the partnership with Single-family Rental operators is really the strongest asset class out there. I call it the prettiest girl at the dance, and everyone wants to get in the capital is flying left and right, institutional investors want to be there, and there's a lot of different strategies. Where you know it may be somewhat of more like looks like a multifamily garden style community, like a Christopher Todd would offer, or next to metro, or just traditional homogeneous single-family product continuous that looks a lot, like the for-sale product it just doesn't have the same amenities. So the big builders like Lennar and Horton are doing that and then you've got JV partners like Taylor Morrison with Christopher Todd and there's a whole slew of them. Every day we get a new one. I mean we had incoming calls on Build-for-Rent all the time and Build-for-Rent apparently got better economics if you're the developer like American Homes 4 Rent. So, the estimate from a just an overall cash on cash return is apparently better if you're a developer and you're the operator as much as 100 basis points on cash on cash return. So, it's a very, very strong market today and the shelter to your point earlier Diana we estimate, right now, even with households that have been consolidating as young adults have been moving back with their families so households are under pressure, are consolidating. We still think we're at a deficit roughly around 900,000 units in United States in terms of what we need to just get back to normal. In terms of single-family. So I think that we are clearly building more supply and the Build-for-Rent market could really help mitigate the affordability challenge if rates go higher.
Willy Walker: Diana you just interviewed David Singelyn the CEO of American Homes 4 Rent that Ivy just mentioned, and in that interview, he mentioned that we've added 3 million new homes to the Single-family Rental stock over the last four years, so we're now at about 16 million homes in America. Do you have any sense of how big that market can or should get, as you know, do the trees just go to the ceiling? Or is there something there where there's a needed amount of that and then he sort of said, you know we think there's a demand for 20 million homes or 25 million homes but it kind of gets to a saturation point of where you can build and the number of people who want single-family versus multifamily.
Diana Olick: Well I don't know if it's a should I mean, as Ivy said, and she's the numbers guru I'm taking notes on your numbers, by the way about the 900,000 units.
Willy Walker: I knew that's why you wanted to join me today you just wanted to take notes for your next report.
Diana Olick: No, I think, look I think there's a lot of runway for Single-family Rental. I love this asset. We termed it when it was the investors who were first coming in and buying up all the foreclosed properties back in the great recession we called it a brand-new asset class. Although it was not brand new because Single-family Rentals with mom and pop landlords have been around since the beginning of time. But it was mom and pop landlords. Then it was finally you know the bigger investors getting in but there's still a very small share of the market. Overall, it's more individual investors with maybe 2, 3, 10 properties versus your American Homes 4 Rent and your Invitation Homes. In that market consolidated because there were a lot of players out there in the beginning, the Starwood, etc. So, I think the Build-for-Rent is the most interesting part of this because what I found like when in the beginning of it, there was this management issue. There was people want to move into these rental homes that are owned by these big companies where they got a house here and a house there and they're all over the place and they have to set up their management structure and rescale, the whole situation. But with Build-for-Rent like when we went to the San Antonio project, which was AHV communities they explained it as an apartment building lying down. So, you basically have a community, the houses were built more close together than they would be in a for sale community. They were very much the same house but they had all the amenities that you would want from a single-family house. They had a pool for the community, there were tennis courts, there was walking trails. It was all of that, but it was incredibly well managed, because it was easy to manage everything was right there for the management. Anything that breaks, anything that needs fixing, mowing, all that stuff was right there. And that's why I think Build-for-Rent is such a great phenomenon in the market now because you can manage it very well and less expensively than you can these sorts of disparate homes all over that they bought after the crisis.
Now how big does it get? I don't know. I mean I talked to a lot of millennials out there who I said well shouldn't you be living, you know, in the loft space downtown somewhere in San Antonio and some cool thing. One of the biggest things, I'm not kidding was pets. And it's not just millennials but young people are now, and even with Covid, obsessed with their pets and there are a lot of buildings that don't allow pets and they were like we want a single-family house for Fido. And beyond that it was more of this kind of you know they liked the idea of living in a community, they didn't necessarily want to live in that denser apartment. So, I think that rental market is really going to shift more towards single-family and perhaps at the expense of multifamily, that's just a guess. After what's happened during Covid and what's happened, and also because young people are not going to be able to buy as easily as previous generations, you know. After the great recession, the savings etc. young people did not come out into the great jobs things got better quickly, but now again with Covid kids coming out of college are going to have a hard time finding jobs. So, there's going to be a lot of longer-term rentals than back you know in the 80s, when you get out of school and you become a homebuyer by the time, maybe you were 30. I think it's more like 35 now and then the ages skewing higher. People get married later; people have children later etc. than that those are the drivers of homeownership. So, I think, I can't say should, or how much, but the number that we could learn, but I do think there's a lot of runway ahead for build to rent and single-family run.
Willy Walker: I think your comment about the dogs and the pets is a fascinating one because it's currently a driver in the market.
Diana Olick: It is.
Willy Walker: But I would also mention that school systems. When people think about where they're going to live and also where companies move their headquarters. When they move, school systems are at the very, very top of the list, and so I think it is important to remember that as kids are being homeschooled or going to school virtually location to the schools has gone to the to the sidelines. And people can be in Florida and have their kids going to remote school in New York City and doesn't make a difference. I think it will be interesting once schools open back up. Both whether people decide to stay and put their kids in the local school system or move back to where they were beforehand to stay in the school system they were in. I think that is one of those variables that has sort of gone to the side as kids have been doing virtual learning and it will be interesting to say what happens when we all come back at it.
Diana, let me let me follow up, we were talking about cost there. You've been reporting as well on the cost of construction going up dramatically and we've seen you know 113 percent increase in the cost of lumber over the last year. Talk for a moment about what home builders are facing as it relates to inflationary pressures on the cost to build.
Diana Olick: Well lumber specifically that's the big one we've been talking about and the National Association of Homebuilders just upped their cost of construction, because of lumber. They were saying last year that it added $14,000 to the construction cost of a newly built home they've now up that did $26,000. Add to that the cost of regulation, which they say is 25 percent of the cost of a newly built home, especially even higher in states like California. And you had the trade wars under the previous administration which increased the cost for some materials coming in from overseas. So, their costs for materials are skyrocketing. Their costs, as I said, for Labor are higher and land as well, which I know Ivy is the expert. But their costs are much higher, and they have to pass that on through to the buyer in some respect how much can they? How much of their margin squeegee? They can't raise prices through the roof, nobody can afford it, but at this point, you know, prices have been going up and people have been buying houses. So, I do think that at some point, you hit an affordability wall. Builders are going to have to you know figure out ways… Whether it's you know moving further and further out if people are willing to move further and further out. But their costs are high and that's all I hear the builders talk about.
Willy Walker: Ivy jump in there on not only the cost to build but inflationary pressures hitting the housing industry.
Ivy Zelman: So I would say across the board there is tremendous inflation with respect to sourcing materials is that in itself is difficult, but the cost of the input costs going into manufacturing products are up substantially whether we're talking to quality cost, anything oil related, copper, brass think everything is rising. And those costs, the manufacturers are passing through with several price increases that they're announcing they'll get necessarily totally realized or announced price what they actually realize, but then the builder gets these higher costs and they've got a pass them through. Labor costs are rising. I was chatting with a distributor who was saying that his truckers we're making $20 dollars an hour as a fleet of trucks, as a major distributor on the West Coast and now he's paying $27 to $29 dollars an hour and he's seeing truckers being poached, not even by our by the housing industry competitors, but in other industries. The builders, the biggest concern I have is that builders right now, the land buying the land grab that's going on right now in this country, because what's happened is they've been so successful and selling so quickly, out of their communities they have opened for sale that they're in our recent homebuilding survey 27 percent of the communities are limiting sales. And they are in Austin 70 percent are limiting sales because they can't replace the communities and there's constraints and higher costs on developing new communities. So it's just across the board. But the biggest concern I have is the land grab. So, as these guys are building out of the communities, it's going to take time to replace them, so they're going on and buying land but they're assuming in their underwriting, not all of them, but a majority of them are using today's record absorptions, sales per community, in the assumptions with today's prices. So, in order to pencil the returns and what you're going to have is they're also buying larger parcels. So what you're going to have, at some point, because home prices, you know, Hovnanian announced earnings yesterday that in February alone, they raised prices 5 percent. We have from our proprietary builder’s survey, home prices up on an annualized basis 13 percent. It's not sustainable. But builders are buying land as if it is. So what will have eventually, the builders will start seeing whether things moderate and the sales per community go back to normal, they’ll be forced to incentivize because they're going to bring… the supplies coming. Once they put that capital in the ground they put sewage, roads, and pipes in place it's coming, so the volumes coming, and it can come in a pretty significant way in 2022-23 based on the capital of spending today. But the question will be they're not going to hold the margin, because everything's inflating and the land prices that they're acquiring are at inflated levels. But they can do mortgage rate buy downs, they can do incentives, they have tremendous margins, that they would be willing to compress to keep the volume going. That's their that's their job is to produce supply so they can't stop buying land. They are in a tough pickle but considering everything else, whether you're just getting appliances. We saw an article today that appliances is what is really challenging for builders to source appliances so they're putting in loaner appliances, and then you gotta rip the loner appliance out, and then you rip the drywall and they've got what they call a little mosquito bites you know headaches, that are nice headaches to have, just as much as they might be bitching and whining. You know, ask anyone in the hospitality industry or the travel industry, and the entertainment industry and no one would be feeling sorry for the builders. But they have pricing power so as much as they complain and whine about lumber prices, they're passing that on to the consumer. And they are seeing tremendous margin expansion so they're doing extremely well but that music is going to stop, and the question is, when, and I think it's all about rates. So happy to talk about rates, but I think right now that's where I’d stop.
Willy Walker: And so on rates Diana, let me just turn to you for a second. Rick Santelli obviously reports on the bond market every morning and watches rates very closely. Eamon Javers covers the White House and the Treasury Department and the Fed very closely for CNBC. What should listeners keep in mind as we see inflation playing into the system as Ivy just said, as it relates to a potential rate increase during 2021?
Diana Olick: I've never been one to predict mortgage rates because I've always been wrong but I'm laughing because I'm in the kitchen and I want to turn my laptop around to my broken dishwasher and the fact that when I called the store to try to get a replacement they told me, it would be nine to 12 weeks. So such as life but that's okay you can wash dishes by hand. What I would say about mortgage rates is this, you know they've started to now track the 10 year treasury, a lot more closely, they had there had been this big widening gap I won't get into I'm sure, a lot of the people watching know that the 30-year fixed loosely tracks, the 10 year treasury yield. You know the trajectory seems to be up I talked to all the mortgage nerds out there no offense to anyone.
Willy Walker: Thanks. Thanks very much, I appreciate that.
Diana Olick: Sorry but they say you know it's all about the ceilings. You know breaking through the ceilings. And we saw these record lows everyone I talked to is because of recovery. Because we're seeing the vaccines come in. Because we are seeing this hope, or as we always call it hopeiom on CNBC, that the economy is going to come back very strongly and we have all this savings, so people are going to start to spend again and that's going to push inflation and that will cause mortgage rates to go higher. So, I do think that the days of us saying you know, last year there were, I believe it was either 13 or 14 record lows set in 2020 on mortgage rates on the 30-year fix. I don't think you're going to see that again anytime soon. Are we going to be up you know 5-6 percent, no. You know, we have to remember where we are historically, which is still pretty low, but people are so used to that three. Oh, my God, if you say 4 percent to a young person right now that just sounds crazy, but again I remember my Dad helping me get a mortgage on my first home and he was so excited that he got me just under 9 percent. I won't tell you what year that was. But I do see the trajectory is higher and that will hit affordability and as Ivy said a while back it also you know who's sitting at a 2.7 percent on a 30 year fixed wants to go to a 4 percent and buy a new house it's more expensive. Not a lot of folks. So that takes people out of the selling and that's what we need right now is not just builders, but we need sellers. You have the baby boomers who were supposed to downsize and give us all of this extra added supply to the existing home market. Now they're not doing that as much, and I would parlay that into another part of the housing market, which I love, which is multi-gen. Which is you know now that we've all been living together we've gotten a little more used to living together, and I do think that the multi-generational model of living is going to expand and that's for the builders and for existing homes because of affordability. So back to mortgage rates, though. I see them as going higher not steeply suddenly I mean we did see that bounce last week, they then leveled off a little this week, came back little but I don't see them coming back significantly I do see them slowly edging on board as the economy recovers.
Willy Walker: So, with the mortgage rates going up and the cost of housing going up Diana you did a piece very recently that I just got to have you talk us through on the first 3D printed home in America. Talk about what it looked like, what it felt like, and kind of the dynamics of what it took to build this home.
Diana Olick: It was bizarre and I'll just say I was so happy to do it last week, because it was the first time I actually got out to do a story in a year because you know we don't fly. And there's a lot of restrictions on quarantine but I was able to drive out to Long Island which does New York State allows reporters to cross borders without quarantine so five hours each way, but it was a great story and worth it. The house is unbelievable what they can do. They built it in two days. It's all concrete and it's, as I said in the piece, which you can see, on CNBC.com or on Instagram and I know that was a plug. They spit it out like toothpaste. It looks like they just go around and around and they build the walls, the foundation all of the… They have slots for where the plumbing and the electrical are going to go. It feels like hard corduroy when you touch. It's bumpy. It's lines, but if you think about exposed brick, that was a style is a style for a while. This is exposed concrete; they can also smooth it for you and make it look like a regular stucco wall. What is so fascinating about this is that the cost, they said it was $6,000. They had to put a roof on, so excluding the roof, and the finishings in the kitchen, stuff like that, and the plumbing -- $6,000. To build the foundation, the walls all the bulk of this house, and it was solid. So it has a lot of climate implications because it's an incredibly resilient home to wind, water, etc. The cost is phenomenal. You're not using lumber to do it. I just, we were standing there for a couple of hours, the number of people… were actually in a cement yard, because that's where they had built the model, so it wasn't like we were out in some nice neighborhood on Long Island. Just car after car coming up to see this house. Investors coming to see the house. The builder told us that he had already had people who wanted him to build entire communities. I then got a call from somebody in California, who is about to announce the first 3D printed community that they're going to be putting up out West. Strangely enough, a lot of Chinese investors were there and no kidding one guy drives up in Bentley with a translator it’s a Chinese couple, and they were trying to talk to the builder who was standing there about buying the house, and he already had hundreds of offers on this house, or on a new house, he was going to build this was a model and he said, well, I haven't decided who I'm selling it to yet, and so the translator says well if we can't buy the house can we buy your company. I’m not kidding you cannot make this stuff. So it's very cool house. I do think, I think this is going to be big. I think once they make it look, you know it was fine looking, it looked like a regular house. It just wasn't that different looking and, if you want to put up drywall you can put up drywall you know it just it's the way they did it that was so fascinating.
Willy Walker: Ivy you've um looked at modular housing, you've looked at prefab housing, and seeing those types of companies like Katerra have a lot of promise and sort of fall off a fall off the table. What’s your stance on 3D printing? Could it be a true game changer to the industry?
Ivy Zelman: I think that you'll have definitely areas where you can see 3D printing coming to fruition. More so in Austin, there's a company that's doing 3D printing, so I think it's going to be more of a niche. I don't know how big it can get. I definitely think that the factory built homes, is something that the builders have been reluctant to give up their trades. The cost is more expensive, but the returns and the overall efficiencies are better but they're not willing to put all their eggs in one basket and rely on one manufacturer, one plant. And many of them don't want to build plants because the cyclicality of the industry. So I think to go to completely factory built is going to really be a long shot. I think there'll be pockets, where you'll see some builders utilizing it. I think the industry's overall sentiment towards it is that it's too cyclical, and too high in fixed costs.
Willy Walker: So similar to it, I know you spent a bunch of the winter in the Florida panhandle Ivy and Diana did a great piece on a home in Mexico beach, which, after a recent hurricane was the only home to survive the hurricane and Diana's article was basically saying why aren't more people investing in making homes hurricane proof and weatherproof. And Diana I take my hat off to you about your entire series on trying to talk about the rising risks to real estate and you went to Louisiana to Baton Rouge and did an article on a whole center they have there on how to make sure that the built environment is ready for the changes that global warming and climate change are bringing to us.
But Ivy similar to Diana telling the story about going to the 3D printed home, what was the most sort of amazing thing you saw when we were down in the panhandle given the demographic shift and the number of people who were wintering down there. You know of all the things that you sort of anecdotally saw down there, which was the big eye opener to you?
Ivy Zelman: I would just say, the number of license plates from out of state and number of people coming from the Midwest or coming from really the Southeast I just think that the infrastructure is not built for the amount of inbound migration, and I think that is going to be more evident when schools are opening. Right now traffic is building. It's just remarkable how busy an area it is that's typically relatively quiet during winters so that was probably the biggest takeaway.
Willy Walker: So I'm running out of time here so I'm gonna come down to Diana on one last one to you and then I'll have one more for Ivy which is somehow or another you became the Peloton reporter at CNBC. Diana, tell us how it is that you were the person who gets the interview John Foley every time he comes on?
Diana Olick: It started with Real Estate! I mean it was as simple as that we were looking to do a story about how New York City had… there was basically this fitness district, which was kind of around the Flatiron district. And one of the big builders was Peloton. He was building a massive, it was the first new headquarters for the company and the company had just barely started. They had this studio. I didn't have a Peloton yet, at the time, and I went to interview him more about the real estate behind it, about how fitness and real estate were we're building new districts and what it meant for the real estate community in New York and I just found his company fascinating. It was, I will admit it, was kind of after the great recession, there was so much news, subprime crisis and the robo signing foreclosure crisis, all this and, and this was during the Obama Administration, there was kind of a lull in news to be honest, in the housing market. And because I love fitness, and I love all these new boutique fitness. My boss, who at the time, no longer works there, but he said well why don't you do a fitness side beat. I said okay, and that was jumping off of this kind of real estate Peloton story, so I ended up doing this I don't know, maybe two years it's short lived fitness beat. But because Peloton went public and because they were kind of the driver, I just really stayed with Peloton. So I do some fitness stories every now and then. Not so much now, but staying with Peloton because that's where it all started and the numbers in that company continue to astound and, yes, I have a Peloton.
Willy Walker: So Ivy a similar question that I had for Peter Linneman when he was on the webcast in early January. If you had $100 million to invest today in real estate, but you have to pick an asset class, where you putting it right now?
Ivy Zelman: Um Single-family, and I would be putting it in to do more, of either fix and flip or building new construction on existing lots that enable you to maybe take advantage of what might be large lots and densify these more suburban infill areas. I think there's a lot of old stock. United States stock is 45 years old, much older east of the Mississippi and we have stock that's in need of great repair, but if we also have very large lots with large homes you're knocking them down, you can build several units on those lots that's what I would be focused on because I think that's where the greatest need is and the greatest opportunity.
Willy Walker: Terrific we are out of time. Diana thank you so much for joining us. Everyone on today please watch Diana on CNBC she is fantastic, and if you have ideas for articles, make sure you send them to her, because she finds these really neat, neat, neat themes that are going on in our industry, and Ivy thank you so much for joining us. To anyone who doesn't get Ivy’s research on the housing market you really ought to. I hope everyone has a great day and we'll see you again next week when Dr. Joe Coughlin from the MIT Age Lab is going to join me to talk about the seniors market, which has the majority of the wealth in America and is a very distinct market with different market needs and how companies either build to their needs or sell to their needs is super important. So, hope everyone has a great day, thank you both for joining. Take care.
