Bullish Homebuilders, Affordable Housing & Prices WON’T Move

Dave:
Hey everyone, welcome to On the Market. I’m your host, Dave Meyer, and we have an excellent show for you today. I know I say that every time, but we really do. Today we have one of my favorite guests we’ve ever had coming back. His name is John Burns. You may know him. He is the Founder and CEO of a company called John Burns Research and Consulting.
They do some of the best original research into the housing market, construction, affordability, anywhere on the market. I love to look at data, but I am mostly looking at and examining other people’s data. John and his team are creating all new data sets to help us understand the housing market better, and we have a fascinating conversation with him where he shares what him and his team have uncovered about the housing market over the last three to six months.
And if you listen all the way through, which you should, you’ll probably hear John blow my mind several times where I’m sort of incredulous, where he has really unique, amazing data to share that I really don’t think you can get anywhere else. Super lucky and excited to have John Burns on the show today. We’re going to take a quick break and then we’ll bring him on.
John Burns, welcome back to On the Market. Thanks for joining us again.

John:
My pleasure, Dave. How are you doing?

Dave:
I’m doing great. Thank you. For our listeners who didn’t listen to your previous episode or appearance on this show, can you just tell us a little bit about yourself?

John:
Sure. I own a company called John Burns Research and Consulting. There’s about 130 of us. We try to figure out what’s going on in the housing market for basically big companies that build homes and invest in the market. A lot of hedge funds, private equity, building product companies, and we do about a thousand consulting assignments a year for them too. We’ve got a subscription research business and then a consulting business.

Dave:
That’s great. And amazing source of data. John’s also a great follow on Twitter if you want to follow some of the research there. One of the reasons I really enjoy speaking with you, John, is because you all do such great original research. We look at a lot of data here, but we’re not producing most of it ourselves. Just at a high level, what is your research showing you about the housing market right now in the broadest sense?

John:
As you said, the problem with doing so much research is then trying to summarize it all.

Dave:
We’ll take your top three points.

John:
Yeah, probably the top three would be household, formation, and migration. We saw actually a decline in households formation during the first year of COVID and then a rapid surge. And we ended up forming 300,000 more households across the country than we thought, than we thought during normal times, let alone a pandemic. We were concerned with all this construction coming, particularly in apartments, that it was going to empty up into a market. It’d be hard to lease up and in turn it was the exact opposite.

Dave:
Interesting.

John:
I know. That that was probably the most fascinating thing, and the data on that kind of lags, and that’s the challenge. But some of the apartment REITs were helping us out with that. Then we just released some migration data where we’ve now got how often people are moving domestically. We haven’t figured out international people coming here yet, and with only a two-month lag.
So the second part of this would be people are moving less. And so some of the migration even into some of the great areas like Phoenix and Texas and even I was really surprised, Orlando, have really slowed a lot. I mean, you go to Orlando and the hotels are all full and you’d be really stunned to see that, but that’s what’s happening. And our consultants on the ground are saying the exact same thing.

Dave:
Okay, great. Well, I have several follow-ups, so that was a good summary. Giving me plenty to talk to you about. First and foremost, before I ask my question, I just want to let everyone know what John is talking about when he talks about households is basically an independent group of people living together. It can be a single individual. It can be unrelated people living together like two roommates.
And it’s a good measurement because it basically measures the total demand for housing in the United States. Basically rentals and houses combined. You take the total number of households and that’s how many residential units that we need. And as John said, it fell a little bit during COVID. Makes sense during sort of lockdown periods, but exploded over the last couple of years. Has it slowed down considerably in the last year or so?

John:
Yeah, so I could tell you exactly. A million three is what we expect in a typical year, a million three households formed. During the first year of COVID, we fell to a million. During the second year we went to a million nine.

Dave:
Wow.

John:
Now we’re back reformed a million three over the last 12 months. I would say it’s returned to a normal level over the last 12 months, but it’s trending down again, so we’re keeping a close eye on it.

Dave:
And do you see that 1.9 was sort of a pull forward and therefore we should expect it to sort of decline in the future? Or do demographic trends support future household formation?

John:
I think there was a huge shift here to people living with fewer people. And we know this because some of the publicly traded apartment REITs have disclosed this, that the number of adults per apartment actually has fallen. People are saying two roommates are getting a three bedroom because they need one for an office, or somebody’s got an ability to work from home five days a week or two days a week, so they’re moving to a suburban location where they can afford more space and a place to live alone. I think some of this been pulled forward, Dave, but I think a lot of this is what I just mentioned. The other thing we’re doing more research on is a lot of tenants are getting help from their parents. There’s a baby boomer wealth effect here that is just, we’ve been talking about forever, but now the data I wish I had was how many people are leasing apartments and their parents are co-signing? Because I think that is trending up.

Dave:
Wow. I mean, you don’t have to disclose your sources, but how do you know that more people are getting help from their parents?

John:
That is more anecdotal, qualitative information, so that’s why I don’t quite have the data on that. But the big companies and a bunch of our clients at our conference last two days were sharing this too, the rent to income ratios have not increased despite the fact that they’ve raised rents like 25% in the last three years. I’m like, “How can that be? Are your tenants getting 25% raises?” They’re like, “No, with some of it, some of that relocation. And I think some of that is they’re including rental income in the application.”

Dave:
Oh, I see. Okay. When you consider RTI, like if someone’s co-signing, you count the parents’ income in that equation?

John:
Well, I’m not sure everybody does it the same way.

Dave:
Okay. So given that 1.3 household formation over the last 12 months, are the patterns holding where you would expect? Like the South, Southeast seeing the most household formation or how does that break down regionally?

John:
No, it’s still strong growth in the South, but I would say most of those markets, even the best ones are growing less than they were a year ago. There’s a couple, like Orlando has actually got negative migration right now of Americans. I think there’s people from other countries moving into Orlando. I think it’s positive, but it is fascinating to me some of these things that you think would be positive that are actually showing negative right now.

Dave:
You mentioned that people are moving less. Is that also sort of across the board?

John:
Well, you mentioned pull forward. I think if people were going to move, they kind of did it a year or two ago. There was some of that. Homeowners though, are stuck. I mean, one of my favorite questions to ask when I give a speech is, “How many of you own a home and how many of you’re looking to move?” And everybody’s hand comes down.

Dave:
No one raises their hand?

John:
Right, or at least they’re not going to admit it.

Dave:
Because then everyone will try and buy the house from them.

John:
Exactly. Exactly. The realtors are really struggling for that very reason right now, there’s just not that much on the market. Interestingly, it is a tremendous beneficiary to the home builders because typically they have about 12% of the homes available for sale are new homes. Right now it’s 32%.

Dave:
Oh, my God. Wow.

John:
So if you want to buy a home, you’re like, “I can’t find anything in the resale market, but the home builders got something” and so the new home market is doing pretty darn well.

Dave:
That is unbelievable. I do want to follow up on that, but I did want to ask you one other migration question. It seemed that during the pandemic people were moving across state lines a lot and that was was making a lot of headlines. But there was some other data I think from a few different sources that showed that people were moving intra-state as well, a lot of out outside from metro areas to suburban or rural areas. Is that pattern continuing?

John:
Well, we’re seeing it and I think it was the work from home trend. You didn’t want to live too far from work because the commute was hell, and then all of a sudden you were told you don’t have to commute or you only got to do it three days a week. “Hey, we can go get that house.” And I’ve been surprised that people are doing it not just to buy a house, but as we talked about, to rent. “Hey, I can rent a nicer place in a good school district. I only have to commute three days a week.” The wild card right now is that how many of them are going to be forced to come back in and how many days per week? That’s the raging debate right now that we haven’t completely put our arms around, but I know not all of them are going to be coming back in. I’m going to say that the rent growth and the home price appreciation in the suburban and ex-urban areas has definitely been more than the urban areas for that reason.

Dave:
Do you have a guess as to the work from home trend? Do you think it’s going to stick around or will it decline?

John:
Well, I think more people are being pushed back into the office, but that said, I’ll pick a number, say maybe 10% to 15% of people who used to have to come in every day are not going to have to come in more than one or two days a week. And that’s significant. And I’m talking about office workers here, people that clean hotels and manufacturing facilities, I’m just talking about office workers.

Dave:
All right. I want to get back to something you mentioned earlier, which was about multifamily construction. There’s been a lot of data pointing to that. I think Q2 this year was meant to be sort of the highest number of deliveries for new apartments across the country. But you said that those apartments are being absorbed at expected rates. Is that correct?

John:
They have been. And that’s been a surprise. I think these migration trends has got to change that conclusion though. I think a lot of these projects are going to open up and need to lease up. And I am hearing this particularly in Phoenix right now, that it’s quite competitive because of the new construction that’s coming online.

Dave:
It’s competitive to find tenants?

John:
Yeah. Rents are falling.

Dave:
There were some data that came out I guess probably last fall, like Q3 that was showing that apartment rents were coming down in some markets. But it seems that’s stabilized, right? On a national basis at least.

John:
Yeah, that’s kind of vintage. I mean, the fourth quarter was pretty crappy. I mean, it’s usually a slow quarter. It was slower than usual and then the first quarter came back stronger than usual. It’s usually a good quarter. And this was stronger than usual and I don’t really know why. I haven’t heard any good explanation for what was going on.

Dave:
Yeah, that’s interesting. I don’t know, but I guess maybe peak fear or something or recessions, I don’t know.

John:
It must have been a confidence thing would be my guess too.

Dave:
Then in terms of new construction of residential properties, single family homes and small multifamily properties, how would you describe what’s going on there? You just said that there’s a huge percentage of the existing inventory on the market is comprised of new homes. Homes about, what? Triple it is normally.

John:
Right.

Dave:
Is that something you think will continue and are builders picking up their construction rate given the climate right now?

John:
They absolutely are. And I’ve got a great data point on that. We survey 20% of the home builders every month and we asked them in November to predict what was going to happen in 2023 and they thought their sales would be down 9% in 2023. We just surveyed them last month and they think their sales are going to be up 7% this year.

Dave:
Wow.

John:
Their business plans have completely changed. And so if you’re running a business and you expect it to be down and now you expect it to be up, you’re starting a hell of a lot more homes. There’s a big bifurcation here. There’s the big companies with great balance sheets that are just killing it. I think there are small builders that have been struggling a little bit, their construction lender maybe isn’t as eager to finance them anymore. And so I think you’re going to see the big builders get bigger through all of this. The overall numbers may not go up at all this year, but I think market share for the big companies is going to go up.

Dave:
It’s so interesting just in the sort of a macroeconomic standpoint, because normally when you see a housing slowdown building goes down and you see a lot of layoffs, for example in the construction industry. But that sort of what you’re saying makes sense. When you look at jobs numbers you don’t see … Construction has been picking up jobs for a lot of the months in 2023.

John:
I think this is probably not making Jay Powell happy. I mean, it’s the housing market that he usually gooses when he needs it, thinks to go better and crushes when he thinks needs to slow down. He’s trying to crush the housing market and it’s not getting crushed.

Dave:
Yeah, that’s super interesting. Yeah, I mean, you wonder if inventory stays this low, if this will continue, it will be boom times for builders or at least single family builders in the next couple of years.

John:
Well, until something breaks in the economy, which Jay Powell seems determined to make that happen. Stay tuned.

Dave:
True, true. Well, you joked before we started filming that we would have to talk about the R word, the recession, but I’m going to wait on that because I do want to talk about something you posted, your team posted recently about construction costs and basically how they’ve been impacted over the last couple months. Can you tell us a little bit more about what you’ve been learning about construction, the trends for construction costs?

John:
Yeah, so the commodities, lumber being the biggest, which has come back down, and that goes for aluminum and a lot of other things that go into building materials. The building material companies are getting some relief on commodities, but their labor costs are still going up. And so they’re not planning on dropping price. In fact, they’re planning for more cost increases this year, but not as much as they charged last year, which is really disappointing to my construction clients. They were hoping to get some big cost relief and other than lumber, they’re really not getting it. I think the companies that made the most money in construction were the trade partners who were just able to charge whatever the heck they want and had a ton of profits. I’m hearing some of their profit margins are coming down. Maybe you go out to bid on something now and you’re getting a better bid than you did, but it’s not coming from the material side of things. It’s coming from the installer just saying, “Okay, I’ll go back to normal profit margins here.”

Dave:
Wow. Yeah, that’s wild. I mean, I guess in a lot of senses it would be good if costs could come down for everyone, but I guess that supports the idea if the builders can continue to pass along these costs to the consumer, which it sounds like they’re able to do, it doesn’t look like new home prices are going to come down anytime soon.

John:
Well, this is not widely known, but nationally the home builders have dropped prices about 12%.

Dave:
Oh, wow.

John:
Yeah. And it’s a combination of price declines and incentives. The biggest incentive is they’ve been buying down the mortgage rate, so they’ve been paying a significant number of points up front to get somebody’s mortgage rate down into the fives and they’re selling homes and their margins are still fine when they’re doing that, particularly because they’re getting some lumber cost relief too. They’re like, “Look, we found a payment here and we’re a better advantage than the resale market now because that hasn’t corrected very much,” and that’s one of the reasons why they’re doing so well.

Dave:
Wow, that’s pretty interesting. I’ve always wanted to get that data. People have asked me that question many times, how you factor in incentives in the decline of price, basically the effective price of a property. Do you just get that from your surveys of builders and figure out how they’re incentivizing people?

John:
Yeah, I mentioned those thousand consulting studies we do. A lot of them are going into new home communities and figuring out what’s going on and helping people price. We collect that data, but I’ll tell you if they want … The builders disclose that on their earnings calls. That’s publicly available information. They’ll tell you exactly what they’re doing. It’s a great data point.

Dave:
And how about the composition of new homes? There’s been a lot made that builders are building bigger houses, for example, there’s not a lot of inventory for “starter homes,” that sort of thing. Has that trend continued as well?

John:
No, their homes are definitely smaller. That we [inaudible 00:19:23] but to your point, they’re probably going from 2,500 to 2,400. I mean, they’re not getting too small, but what they’re trying to do for an affordability solution is build a smaller home. Ideally they can get one more home per acre or something like that and divide the land costs across more units. They’re been stripping costs out of the house now too, so houses are a little more bare bones than they were a year ago. Again, to get the payment down because mortgage rates have risen so much, they got to get the payment right.

Dave:
So it sounds like there has been a little bit of affordability relief for the new home sales market. Do you see it falling any further or given what you’re talking about, it’s probably going to stabilize?

John:
Define affordability relief. Mortgage rates have gone up, so that’s been affordability disaster. But they’ve been batting that with all these other things. I think on a payment standpoint though, Dave, it’s still more expensive than it was a year ago for somebody to buy a house.

Dave:
So you mentioned the recession and Jerome Powell. Why do you think despite the efforts of The Fed to cool the economy, the housing market is holding up as well as it is in terms of price? Volume is obviously down pretty significantly.

John:
When The Fed raises rates to cool the economy, it usually takes 12 to 18 months. We’re kind of in that place right now. It just takes a while to go through the system. I think it’s a lack of resale supply and I think it’s some of that baby boomer wealth I mentioned too. The Fed’s never done this right after the government distributed trillions of dollars all across America. I mean, there’s some real haves and have nots out there, but the haves are still spending and doing fine. And probably the biggest have is businesses whose balance sheets have never been better. Even look at the publicly traded companies, they’re in great shape. In fact, this last quarter they bought back more of their own stock than ever before. I mean, what’s a sign of having a great balance sheet more than that? He’s really fighting it uphill battle where he’s trying to slow the economy, but everybody’s in great shape. Not everybody.

Dave:
Yeah, but it’s difficult. What is your take about the recession? I have to ask.

John:
Well, we were planning on one in the back half of this year, and now it looks like if he’s going to get it, it’s probably going to be early next year. There’s lots of definitions of a recession, the negative real GDP, that could happen this year. But that could just mean the economy’s growing at 3% and inflation is four. That would technically be a recession. I mean, what we care about is unemployment going up and The Fed’s own forecast is saying, “We’re forecasting unemployment to go up a percent.” They’re trying to do that. Right now people that are getting laid off seem to be finding jobs right away. Unemployment really hasn’t moved much at all. And that’s why we pushed it off to next year is I think The Fed is really having a tough time getting the economy in check and bringing inflation back down, which they’re adamant about doing.

Dave:
That they are. They have been very clear about that. Do you think that there’s any possibility that the economy is less interest rate sensitive than it used to be?

John:
Well, if you’ve got a great balance sheet and interest rates go up, you can handle that. I think you can make that argument. Well, another argument would be that thanks to Dodd-Frank, everybody’s got a fixed rate mortgage. There’s hardly any adjustable rate mortgages out there. Rates are going up, but your house payment isn’t changing. And that was not the case before. Usually about a third of people had an adjustable rate mortgage. I think that could be the case. What makes me hesitant is consumer credit card debt and other things are near all time highs and they’re very interest rate sensitive. The auto industry is very interest rate sensitive. The housing industry is very interest rate sensitive and there’s not a lot of housing. I mean, a realtor or a title company, you’re really struggling. I think you may be correct, but I still think it’s interest rate sensitive.

Dave:
Yeah. Yeah. I’m just curious, I mean, it’s just interesting because you think about how housing being one of the most leveraged industries or asset classes and it’s holding up, but there are obviously other variables to that. But I’m curious if the tool, especially like you said, after distributing trillions of dollars, is the tool just not as effective as it’s been in other scenarios when they’ve raised interest rates to try and accomplish the same goal?

John:
So about 10 years ago, speaking about levered, there was about an equal number of debt and equity in America. There was about $9 trillion in debt on houses and about $9 trillion in equity. Today it’s 12 trillion in debt and 31 trillion in equity.

Dave:
Oh, my God. What?

John:
Exactly. Most people-

Dave:
Wow.

John:
… are not levered at all. In fact, a third of homeowners, Dave, don’t even have a mortgage.

Dave:
Wow.

John:
I mean, those are the primarily the baby boomers.

Dave:
That blew my mind. I had no idea where you were going with that. That’s incredible. I mean, I guess it makes sense that equity growth and property values has just been remarkable even before the pandemic, going back like 15 years now or 12 years.

John:
Yeah. I just looked at this, and I’m not going to get the math exactly right, but everybody refinanced too. I think there were nine million people who refinanced without pulling money out. And so they got their payment down an extra … I think it was 2,600 bucks a year people saved. Nine million homeowners saved 2,600 bucks a year, and then about another four million refinanced and pulled some money out and their payment went up an average of 1800 bucks a year. When you drill down into it, it’s like this was a great opportunity to reduce your house payment and then home prices go up 45% in three years too, and you’re sitting on that mortgage.

Dave:
That’s super interesting. Yeah, I didn’t realize how many rate and term refinances there were and saving all that money probably contributes to inflation too, and how people are holding up. It’s just $2,600 or more spending power that those homeowners have.

John:
That’s a great vacation every year.

Dave:
Yeah. Sounds nice. Well, John, I did want to ask you about something. One thing we’re starting to see here a little bit is some legislation coming into place to try and create more affordable housing. Are you familiar with the Live Local Act that was passed in Florida?

John:
Yeah, and our team in Florida … You mentioned Twitter. We also do a newsletter every Friday. We publish a lot of content for free, and our team in Florida wrote a piece on the Live Local Act about within a week after it being passed, so in April. They know more about it than I do.

Dave:
So from my understanding, it’s a policy that just went into place that will attribute $711 million for housing projects and assistance through a state entity there to create and build on housing programs. The bill goes into effect July 1. Your team has looked into this. What do they think the impact of … It seems like a big dollar amount. Do you think it will have an impact on affordability?

John:
It is a big dollar amount. Although developers of Florida are super excited about it. It’s for development, and you have to set aside, I think it’s 30 to 50% for affordable units, but affordable is 120% of the median income. It’s not that bad. It’s not like you have to go down to 50% of median income. And I was just talking to Leslie Deutch, who’s our team member who runs that in Florida. She said that you can do that and a $360,000 town home qualifies. I mean, you can get the subsidies. The bigger thing, Dave, though is they’re cramming down on the cities that you can’t stop the rezoning. If they want to scrape a Kmart and put apartments on it or put town homes on it, the city can’t stop it. It’s the state’s attempt to combat the NIMBYs.
That has nothing to do really with the $711 million, but that could be a huge construction boom because getting those approvals, as you know, is really challenging at the local level. They’re trying to mandate it. It’s piggybacking out what California did here a couple years ago with accessory dwelling units. They basically told the cities, “Hey, you can’t stop people putting accessory dwelling units in their backyard.” And we went from something like 1,680 units a year to 21,000.

Dave:
Wow.

John:
Here in California. The cities are still trying to fight it. But it’s interesting that these bigger entities, the state level are trying to solve the problem because the problem really is local.

Dave:
Yeah, it does seem that way, and I know Washington did something similar with the ADUs. Colorado I think is considering it, and it does seem like a lot of states are considering this approach and does seem like a reasonable way to improve the amount of affordable housing in the market.

John:
Yeah, and if Fannie and Freddie, they’ll allow you to include tenant income on some of these things, but right now it has to be backward looking. You can’t borrow for something you haven’t leased out yet. You got to show 12 months worth of history. If they would just look at it like typical apartment financing where they know that, “Hey, that’s going to be leased up at 1500 a month,” that could help a lot of people build an ADU.

Dave:
So is it similar to other lending requirements where you need two years of rent to be able to count it towards your income?

John:
Yeah, I had heard one, but you would know better than me.

Dave:
Okay. Yeah, yeah. I mean, I think it depends, but interesting. It sounds like these are interesting ideas. Obviously for the people who would get those affordable, let’s call more affordable housing, that would help, but do you think that will have any impact on broader prices? Let’s just continue with the Florida example here. Do you think it would actually have an impact on appreciation or home prices in that market?

John:
Well, it should. I mean, the more supply you put into a market, the more demand and supply come back into balance and you should see less price appreciation and less rent growth.

Dave:
Yeah. Well, I guess it’ll be an interesting case study to see here if it’s going into effect so soon to see what’s going on. Because obviously prices in Florida have gone up at some of, if not the fastest pace in the entire country.

John:
60% in three years across the [inaudible 00:30:45]-

Dave:
Wow.

John:
Yes.

Dave:
That’s unbelievable. Wow. That’s staggering number. You’re dropping a lot of good stats here, John. Well, John, as I shouted out, John’s a great follow on Twitter, but if any people want to learn more about your research, is there anywhere else they should do that?

John:
Yeah, we post even a lot more on LinkedIn, so just follow our company on LinkedIn and we have a newsletter. It’s JBREC.com, where there’s a ton of free content there. That’s our marketing is giving some stuff away for free, so I would recommend that. Then if some of your clients are flippers or maybe good sized landlords, we have a couple surveys where we survey flippers and landlords and if they want to participate in that, it’s just a couple minutes a month or even the flipper ones once a quarter, they get all the data associated with that as well.

Dave:
It’s a great offer, so definitely check that out if you’re interested. Again, it’s JBREC.com or check them out on Twitter or LinkedIn. John, thanks again for joining us. We really appreciate it.

John:
You bet, Dave. Thanks.

Dave:
Thanks again to John for joining us today. That was an incredible episode. I hope you guys enjoyed it. I think John is as good as it gets in terms of summarizing what is going on in the housing market and the housing industry in general in a really concise way. Hopefully this gives you a better sense of what is happening. I personally found that data about new home construction really fascinating. If you look at the history of recessions and housing, you see that tip. This is really unusual where there is an economic downturn or home sales volume declines, but builders are actually increasing their building and they’re doing really well. That was really interesting and something I’m definitely going to look more into. And I really enjoyed his commentary sort of about the policies that we discussed at the end about Florida and some of the efforts they’re initiating to try and improve affordability in the housing market.
It’s wild to hear that housing prices in Florida went up 60% in three years, and it’s good to see that … Who knows if these policies are going to be the exact right ones, but at least there is some effort to try and increase affordability in those markets. I would love to hear what you thought of this episode, and if you liked it, please give us a good review on either Spotify or Apple. We really appreciate good reviews and if you get value out of this episode or any episode of On the Market, we would appreciate you taking a couple of seconds to leave us a great review. Thanks again for listening and we’ll see you next time for On The Market.
On The Market is created by me, Dave Meyer, and Kailyn Bennett. Produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media. Researched by Pooja Jindal, copywriting by Nate Weintraub, and a very special thanks to the entire BiggerPockets team. The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.