Transcript: "The Housing Expert Guiding the Homebuilding Industry"

The text below is a transcript of the audio from Episode 37 of Onward, "The Housing Expert Guiding the Homebuilding Industry".

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Ben: [00:00:00] John Burns, welcome to Onward.

John: Happy to be here, Ben.

Ben: So let's just dive right in here.

Ben: I follow all of your reports. There's a voluminous amount of reporting that you guys put out. But it feels like in 2023, you were forecasting a recession. So was I. What did we get wrong? Why did we get it wrong?

John: We do guide our clients into what we think is going to happen in the housing market. And to do that, you have to have a view on the economy and on mortgage rates. I don't consider myself an economist. I don't consider myself, Jim Grant from Grant's Observer, a kind of a Market rate forecaster, but we read everything we can and 66 percent of economists were saying we're heading into a recession as we've studied past recessions.

11 of the last 13 have been caused by some sort of financial crisis, which usually means there's. Too much leverage in the system somewhere, and then it's got to come down. I don't think anybody would know that better than the biggest lenders in the [00:01:00] world. And both Jamie Dimon from J. P. Morgan, David Solomon from Goldman Sachs, James Groen from Morgan Stanley, were all saying this is going to be a big recession.

In fact, Dimon was making the analogies to a Hurricane Sandy like recession. So like, are these guys know more than I do? I think that's the most likely scenario. And two thirds of economists agree with me and it didn't play out. Now they're saying, well, maybe we were just early. In the meantime, JP Morgan's reported a record profit.

So I wonder if he was talking to his book or something, but I don't think so. And we had so many years of aggressive lending. I'm still waiting for that to play out. I don't think this means for sure we got through it. In my career. The S& L crisis in the early 90s, the great financial crisis with Lehman Brothers blew up.

They were like three year long warning signals before something happened. We may just be two years into a three year warning signal. We'll see.

Ben: One of the data you put out is called the Burns [00:02:00] Economic Leading Indicator. And so in the recent report I saw, it was below 30, which typically means at risk of a recession. How do you think about that?

John: We have this other indicator I pay more attention to for my clients called the Housing Cycle Risk Index. The risk flags have been there for two years. None of these indicators are any good at calling the timing. They're all good at saying, Hey, things are unusual right now. Be careful. And frankly, that's how I think our entire industry has been behaving through all of last year and through all of this year, we're recording now and nothing has happened, but I can see 12 months from now.

We're saying, well, we knew it was coming. We can't point to where the one thing I feel very comfortable is it's not mortgages. Mortgages are pristine and everybody's been underwritten and it is not going to be the housing market.

Ben: Yeah, home mortgages.

John: Yes, you don't finance a long term asset with short term debt and expect that not to blow up.

And that's what [00:03:00] happened to the housing market when everybody got adjustable rate loans. That's what's happening to the commercial real estate market right now, as you know.

Ben: 2008 was very different housing market than it is today. So, okay, well, let's get into your. Great expertise, which is the housing market. So could you share your forecast for housing? Cause it seems like from all of the stats I was reading on your reports, mostly were normal indicators, normal housing market forecasts for growth and appreciation and new supply.

So can you break it down for us?

John: I don't quote forecast stats publicly, but I've been showing this graphic that I used ChatGPT to create of a dark cloud over the housing market, and it's been that way for some time, and you just can't call the timing of it. And so we think the ratio of mortgage payments to income, and we could talk about rents too, is more than 30 percent higher than it needs to be.

So something has to give. Either prices need to come down, mortgage [00:04:00] rates need to come way down, or wages need to grow, or some combination of the three. And since I can't find the impetus for Supply to exceed demand. Yet, we're not predicting the timing. So we're just saying we think we're going to muddle along as usual, but manage your balance sheet accordingly because the housing cycle risks are there.

And if the housing cycle risks go away, which would mean through strong wage growth, which we were seeing for a while, that slowed down price corrections, which we've seen in some markets like Austin, Texas. So, Mortgage rates came right down, which everybody's fingers are crossed, and they're all Fed watching that they're going to fix that.

By the way, I should mention, it's not the Fed funds rate that impacts that as much as the fact that the Fed was the buyer of 25 percent of all mortgages, so they were most of the demand. For mortgages and they've pulled out, they've intentionally left the mortgage market at 7 percent right now. J PAL, I think he wants to engineer [00:05:00] some sort of home price correction in my view.

Not crash, but a correction.

Ben: Let's give the audience a little bit better understanding of your background. You have a large organization. You walk people through the scale of your organization, the kind of work you do, how do you get to such an informed position. There are very few people in the country, I think, who have as much expertise as you do.

John: In the 1990s, I was a real estate consultant and saw how sophisticated the commercial real estate industry was compared to the residential. So I started a business in 2001 to bring some of that commercial sophistication to residential. So, I mean, people didn't have. Research departments and market analytics.

And you'd think a publicly trade home builder whose fortunes are based on mortgage rates would have an economist on staff and they didn't, they still don't. It's very expensive. So I said, I'm going to build up an organization to be that outsourced research department for businesses. And slowly and [00:06:00] steadily, we're at 140 people.

Now we have a big consulting arm too, where we do almost a thousand feasibility studies a year. So we've got good boots on the ground, not just the data. We ask our clients to help us figure it out. So we've got home builders, huge number of apartment and single family rental and builder rent clients. A lot of private equity guys are investing in the industry, hedge funds, growing number of building product companies who are keeping us super informed on what was going on in the supply chain.

And I just kind of sit in the middle and pull it all together for our clients. I don't disclose confidential information, but we're the outsourced research department that's less than the cost of a person for everybody.

Ben: That's a great description. So the outsourced economist and research department for housing, and for the housing industry, every home builder that I know sees you as the primary source. So you're both the source of data and you reflect what the housing industry [00:07:00] thinks too.

So there's been a dark cloud or it seems like a high risk environment for a couple of years. The housing market has surprised, I think me, Looking back at your expectations to now, what did you get right or wrong? What were the reasons why it surprised you so much?

John: We were involved in calling the downturn correctly last time because we knew what some of the factors were, but I'll say they were way worse than we thought. I'll talk about this in that light. We knew there was economic stimulus out there. And that was propping things up. We knew that people had a financial incentive not to sell their homes, so there was going to be low resale supply.

And we put both of those things into our equation. They were way more impactful than we thought. I thought, hey, well, people will still move to Florida. There's 36 million mostly older retirees that don't even have a mortgage. They're still going to be moving. There's been just no resale [00:08:00] supply. And for prices to correct or be soft, you need some supply.

So demand is down, but supply is down even more. So I missed that. And then the economic impact of the stimulus was more significant and lasted longer than I thought. And I'm a little disappointed in myself on this one, because I did have a number of clients telling me that. And I said, Oh, this is the exception and not the rule.

The tremendous home equity that was created allowed the baby boomers, which I'll call them the helicopter parents for this discussion, are continuing to helicopter their adult kids by helping them with their rent and helping them Buy houses. All of that. And then the one that I don't think any of us could have predicted was the surge in immigration.

In fact, if anything, I think we were expecting the opposite. And so much of it has been about people flooding across the border, and that is very true. But a lot of it has been [00:09:00] affluent immigrants getting the hell out of whatever country they wanted to, because they had the money to fly out of Ukraine, fly out of Russia, come here from a huge buyer population in India.

And I'll mention Chinese and Indian cultures have a huge preference to own new over resale. Nobody predicted that. I live in California, in Southern California, which has net domestic out migration. Orange County, California, where I live, is the strongest price appreciation in the market right now, and it's completely driven by Chinese immigration, in my opinion.

Ben: Wow, there's a lot to unpack there.

John: But it's because of what's going on, and they locked down again in 2023. That was the final straw for a lot of people, and everyone's worried about the government taking their money away and other things, and so, if you've got money, You're coming here and it only takes a couple hundred thousand of those to really really move the market Not the millions that are coming across the southern border.

Ben: My personal experience, because [00:10:00] I have some Chinese. Friends and business associates who got visas and left China, and they're all tech people. The whole tech industry was crushed by the President Xi regime. They left.

John: What you can get for your money in real estate in a very expensive California, you can get more for your money here than you can in China. So it does not look that expensive to them. I think you've got to put your consumer hat on. I don't understand that culture as well as I should, unfortunately.

Ben: Let's just go back to supply and demand for a minute. When I look at a market, I really find that supply and demand is just the most important part of it. And prices, you can supply of money, or you can supply of consumers, supply of housing. So, just to summarize what's happened. Because interest rates are so high, people aren't moving, and so resale of existing homes has fallen.

Is it a historic low? I mean, has it ever been lower than it is now?

John: Well, I'm sure you can go way back many, many, many decades, but [00:11:00] in terms of a percentage of owned homes, I would be surprised if it's been lower than it is right now. Maybe during a world war or something.

Ben: Okay, so there's no supply of homes, so that what's available, there's still demand from people who have Life events is what you call it.

John: We are seeing, even people with 3 percent mortgages move, we are seeing those life events, when they move, they put their home on the market somewhere, it gets gobbled up in a minute, and they're happy, and then they get in a bidding war on wherever they're going, so, there is that.

Ben: The other thing that has been really interesting is that the new home Market has held up and although it's actually I think the same number of homes has doubled its market share of homes sold

John: That's a misnomer, so, it keeps getting reported wrong. They've got double the normal share of homes available for sale. Um, the homebuilders historically have sold about 15 percent of all the homes in the country. They fell to [00:12:00] 11 over the last decade. They're back up to 15. So the actual number of closings is their normal market share.

But if you fly somewhere right now, they're usually about 15 percent of the homes you can purchase. They're 30 percent of the homes you can purchase. But a lot of those homes aren't finished yet. So you got to wait for them to get finished. So net net, the builders have been a huge beneficiary here because if you're moving somewhere, they've got almost a third of the options for you to choose from,

Ben: Well, so they're 30 percent of the market available for sale But they're only selling 15 percent of the homes that transact.

John: because a lot of those homes aren't going to be finished for 90 days, 120 days,

Ben: Well, does it eventually catch up and we end up at 30%?

John: it might, it's growing slowly. They can't build them fast enough. So as I mentioned, it's gone from 11 to about 15. We could end up at 18, 19, 20, if there continues to be no supply on the resale market. The other [00:13:00] challenge they have is they have to go to where there's land, so it tends to be in the outlying areas, and that may not be the neighborhood you want to live in.

Ben: And has that kept the economy healthy because there's so much construction? Can

John: Construction is a big part of the economy, and I think it has, and you know, the slowdown in multifamily construction right now is one of the reasons the economy is slowing, like you alluded to earlier, and is one of the reasons our leading economicators is showing more of a red flag now. The leading economicator index you talked about, every time it's fallen below 30, it's been a precursor to recession, but you can't.

Say, oh, it's coming in three months or nine months or sometimes even 15 months. It usually takes a while.

Ben: you break down what's in that indicator, like, what about it leading? You'd believe that there's a likely recession.

John: I did that so long ago I don't even remember all the inputs and our head, our head of research Rick Palacios would probably know that off the top of his head. That's based on 80 years of history. It's just math. An inverted yield curve [00:14:00] has always predicted a recession. We have an inverted yield curve. A rising unemployment rate is the trigger for the SOM rule which leads to a recession.

We're having a rising unemployment rate.

Ben: But not triggered yet.

John: Not triggered yet. No. We're getting a warning. We pulled all those leading indicators together, if you will, into one index just to make it simple.

Ben: I see, okay, so sort of like a super index of leading indicators. And they're not forecasting very positive. economy. One of the ways you can think about the future is to look for things that are abnormal and just sort of list out things. For example, in stock market bubbles, prices get far from the norm.

Like they call it a one Sigma, two Sigma events. A variance from the median or average you named a few, but I'd be interested in sort of you to send you can recall kind of rattling off some of the things that you think are so extraordinary. These days,

John: So what's [00:15:00] abnormal is everybody's got a fixed rate mortgage that was properly underwritten that they can afford. That's never happened before. We've never seen the yield curve inverted this long. We had never seen prior to the last 15 years, the Fed actually buying mortgages and they were buying a quarter of the mortgages and then they pulled out.

So they're controlling the long end of the curve really for the first time. Probably never in American history. Have we seen the labor force of people aged 20 to 64 growing so slowly until this immigration surge happened the last two years, and that was perfectly predictable. We wrote a book called big shifts ahead on housing demographics eight years ago.

And we fully predicted this was coming because it was just, we're all getting a year older. It wasn't that crazy. We actually saw more immigration last year than ever before. And I went all the way back to when we had the Statue of Liberty and everything, and there were more immigrants last year than ever.

That's another [00:16:00] wrinkle to throw in all of this. Internationally, we're more dependent on each other economically than ever before too. We've had pandemics before and I've gone back and studied several of them, but we've never seen the IRS cut checks to everybody in America before. The small business administration did 40 years worth of loans in 40 days.

When they did the PPP loans. I mean, you can just keep going on and on and on. Our fertility rate is dropping, which is concerning too. This is why we try to put things into one index because it just gets overwhelming.

Ben: he didn't even mention the size of the federal debt. Certainly historic. I,

John: Full disclosure, I voted for Ross Perot 30 plus years ago because I bought into the fact that a trillion dollars in debt was way too much. I saw somebody publish a great quote from every single president for the last 40 years talking about the concern that the debt can't go any higher. Democrat and Republican.

Okay. [00:17:00] At some point, I think we're going to pay the price for that, but nobody can determine that either when that is.

Ben: well, let me come back because he said a bunch of really interesting things. I want to make sure that I understand them and everyone else does too. So you said the fed. Was buying 25 percent of all home mortgages that were issued and they stopped buying them Are they now reinvesting the proceeds in the short end of the curve?

You said they're controlling the long end of the curve What do you mean by that?

John: So coming out of the great financial crisis, they only bought short term treasuries and short term, everything fed funds, right? They had never owned 30 year securities. They had never owned mortgage backed securities and the way Bernanke and Yellen basically kept mortgage rates down as a stimulus was they were buying the mortgages.

So you and I get a mortgage, they get pulled, they get sold onto Wall Street. Who wants to buy them? The Fed will say, I'll start, I'll be one of the main bidders here. They're [00:18:00] buying more than a quarter of all the mortgages, which keeps the interest rate down. And then More than a year ago, they stopped buying mortgage securities, which has caused the spread over the 10 year treasury, which is how most people look at mortgage backed securities to blow out.

So even though the 10 years has been coming down, the mortgage rate has not completely engineered by the fed. And the question is, is anybody going to step in and replace the fed? You know, the banks have been big buyers of long dated securities too. But they're in trouble for doing that. So they're not buying them either.

So that's why we have 7 percent mortgage rates. So it's actually surprising. They're not higher.

Ben: You said this it's really important and maybe most people know it but in reaction to the 2008 financial crisis banks and lenders tightened up They're lending standards, and so the loans that were made to homebuyers were to high credit, high quality borrowers, and they were [00:19:00] typically at 80 percent loan to value or relatively conservative loan to values, and so you have a decade of, you know, Lending or more, right?

Deck and a half lending end up with a very, very healthy home mortgage pool,

John: You did. You're right. But then what bond fund was going to buy mortgage backed securities when home prices were falling. That's the recipe to get fired. So the fed set up, we're going to do it. They kept the mortgage rates down and the mortgage rates fell. And that helped the housing market recover. So kudos to them.

If that was the goal, they accomplished it.

Ben: isn't there something like 70 percent of home mortgages have a fixed rate, low interest mortgage, or is it more than that? Even

John: We were at 81 below 5%. I think it's like 76 or 77 right now. Below 5%,

Ben: fixed. Yeah. So that makes for a healthy mortgage and healthy home market. There's no forced sellers, no foreclosures.

John: those mortgages are very [00:20:00] safe. And there's like no defaults on them. Who would default on that? You'd sell the house for a huge profit. Instead.

Ben: And so then that's what's constraining supply of housing, which is keeping prices up. So then, if rates fall and a lot more supply comes to market, because everybody says, oh, now I can sell my house because rates have come down, does that then flood the market with supply of housing?

John: It could have rates fell a lot. I think we'd see a lot more people who want to move, move.

Ben: And would home prices fall with it, counterintuitively?

John: I don't think that's necessarily a lockstep because at the same time, housing gets a lot more affordable for our home buyers, supply would come up. But demand would come up to the real supply. Surges come from distressed selling. I've been waiting for. Maybe not distress zones, but investors and not the Wall Street types, more of the mom and pops who bought five homes, 10 homes to be putting their homes on the for sale on the market, [00:21:00] particularly now that insurance costs and other things are going through the roof.

You could see a lot of that. So we're paying attention to it carefully. We're seeing some of it, particularly in Florida, but not enough to really greater the market. That's why you talked about our forecasts are being. Everything growing slowly or staying flattish for the next couple of years is we just can't see the impetus for that supply to come to market.

If all those investors woke up tomorrow and sold, sure. If all the people that wanted to move to Florida and aren't. Because their mortgage is low, they have the ability to move to Florida or Texas. Sure. They'd also be buying a home wherever they're going, so it'd be very geographic specific. There's an extremely low level of first time buying right now.

I mean, the apartments are full. All the apartment reads have disclosed that the reason for people moving to buy a home is at an all time low. Falling interest rates would pull a lot of those people out of apartments and turn them into homeowners. So, [00:22:00] that's why we just don't see the big supply exceeding demand mismatch coming anytime soon.

Ben: One of the things keeping the economy healthy is labor force participation. So the number of people who are participating in the workforce is, I think at an all time high, or near all time, it hasn't been this high since maybe, Early 80s? I think there's two ways to look at that. That's very healthy or a sign typically when he gets to that all time high.

That happened shortly before a recession and unemployment softens. So do you see that as a strong indicator or a leading indicator of a problem?

John: There's two things. I was referring just the absolute number of people age 20 to 64 is not growing. The number of people that you and I can hire, other than the immigration surge we just had, It was barely growing. We went decades where it was growing by 2 million people per year. And it's only been growing by a couple hundred thousand.

So that should be a sign of a slowing economy because that's fewer adults to [00:23:00] work. The other thing you're pointing out is the percentage of those people that are working is at an all time high. And that's usually an indicator of a coming problem. I think what it's usually an indicator of it being really easy to get a job.

Which has been the case. And that's why it's at an all time high. And usually it's really easy to get a job at the end of an economic cycle. So I think that's why it's been correlated with a future recession. That's not part of our leading economic indicator index though.

Ben: You mentioned this, but when you think about regional differences, which regions do you see in the next few years doing better and worse?

John: When I started the company, it was all about which regions are better and worse. And our clients rely on us to allocate capital to the Phoenix or Atlanta or Dallas or California, And then it kind of stopped being that way during the whole great financial crisis. The recovery has been very uneven. The economic growth in Texas [00:24:00] has been absolutely astronomical the last decade.

We talk about the lack of construction, the supply in Texas has been at an all time high in Texas. It's been nowhere near an all time high anywhere else. So, Texas has been the strong growth with supply trying its damnedest to catch up with it for a very long time. Austin's growth, as you know, is very tech oriented.

That market hit the skids with an all time high of supply, particularly apartments, so things are pretty rough in Austin right now. In Dallas and Houston, the economy's gone from being crazy robust to just robust, and the demand and supply right now are relatively in balance. Phoenix has lost some of its economic engine to Texas, in my opinion, so even though Phoenix is growing, It's not growing like it used to, and the speculative investment that we've seen in Phoenix has been very high.

And I think some of that investment has pulled out, so we're seeing [00:25:00] some softness in Phoenix for those reasons. Florida, you can buy homes for cheap during the downturn. There are a lot of people that bought homes for 10, a house just when they were at the auction block. There's been a rise in listings this year in Florida, and we can't quite put our finger on it, so I'm just speculating if it's investor driven.

Although I know insurance costs and other increases are causing some people to leave, but I also think insurance costs are really painful for investors. I mean, if you're a landlord and your insurance costs go up 20%, your rent's not going up to cover it, and homeowners are willing to be in a bidding war for homes, which they are right now.

It's time to sell. We're seeing some of that,

Ben: We own a fair amount of homes. We're selling some of them, and we saw the housing market surprisingly upside. Mhm. Through last year and this year and then really soften the last few weeks, maybe only a month ago. [00:26:00] I'm not sure if that's seasonal or the sort of economic softness is creeping into the housing market.

John: but we're seeing the same thing. We're recording this in the middle of July. We're concluding that it's primarily seasonal with some of the long term slowdown and affordability issues going on at the same time. There is a lack of consumer confidence and you will in the future, which is. Somewhat typical heading into an election season.

Why buy in July when I can wait till December? There's some of that.

Ben: And what markets you see is problematic in the midterm.

John: I just mentioned some of them. Austin, Phoenix, and Florida.

Ben: So you're not seeing concerns about northeast or west. If

John: actually the Northeast and the Midwest because they have had no froth and very little investment activity that are holding up the best. What I should have mentioned earlier when I keep talking about the for sale market here, but I know the for rent market is super important, particularly to you.

[00:27:00] We've seen a lot of built to rent, uh, rental product in Dallas and Phoenix primarily because that's where the entrepreneurial companies that started doing this are headquartered. We're seeing some softness there due to Oversupply at a certain rent range that probably is 500 bucks more than it would have been five years ago.

Ben: To recap what I feel like I'm hearing is that where there was the most growth, There was also the most supply and then the most softness as a result and then conversely where there was Less supply is usually where there was less growth and that's Northeast and you said the Midwest I was asking also about the West.

It seems like Seattle had one of the hardest hit housing markets I wasn't really sure why.

John: The tech markets were pretty soft the last few years. I remember, and I'm sure you do too, the tech bubble in 2001 and it burst and how hard the tech markets got hit. The tech bubble, in my view, [00:28:00] this time is much bigger than it. I mean, there's all these unicorn companies out there that still have not turned positive.

And they really. Took a dive here. And so Seattle, San Francisco, Austin in particular got hit. But then all of a sudden AI comes along in the last year and all those people are getting jobs and you kind of new tech bringing the market back slowly. I think that's primarily what happened to Seattle.

Ben: It appears that the likelihood of a Republican sweep of the House, the Senate, and the presidency is Much higher chance of that than before are there policies or economic impacts of a Republican sweep on Housing that you see is likely or you're thinking that people should pay attention to

John: We have three conferences a year and the one we just had are one in Laguna beach. The chief economist from a Renaissance macro, Neil Dutta had pointed out that it's studied history. [00:29:00] And every time Congress and the White House was united, Democrat or Republican, we had inflation because basically people could get things done.

So instead of a stalemate when it's divided, whatever we're going to be spending on gets passed and you see a lot of government spending. So his conclusion on that, and it's not to be political, Republican or Democrat, just as they're united, you're probably going to see things get done. And I would agree with that.

I think the immigration policy here Not just policy, but actually the execution of the policy because sometimes this is not the same thing. The immigration we've seen has strengthened home prices and definitely filled up apartments. I mean we're coming off a 50 year high of apartment completions and they're getting filled up faster than most people thought, myself included, and I think immigration is part of that.

If we're all Republican, you'll see the Republican immigration policy play out.

Ben: I've [00:30:00] learned a lot about immigration from reading your reports and you have done more analysis in a more apolitical way than anybody I've seen.

John: That's a very nice compliment. Thank you. I really try to do that.

Ben: So some stats I've learned to kind of tee you up. So just to put this in perspective, in 2019 there were 400, 000 immigrants to the United States. It's, you know, pre COVID just as a normal year. And then 2023, there were 3. 3 million immigrants.

John: Yeah. Insane. Our chief demographer, Chris Porter and Eric Finnegan, who does a lot of our demographic reports, got under the hood and they looked at it country by country. It was fascinating. Everybody focuses across coming up the border, but Ukrainians got the hell out for obvious reasons. Russians got the heck out for a huge, huge surge in Chinese.

Huge surge in Cubans because they had some door to get out through Nicaragua that I didn't realize. It just kind of opened and you can get out to Nicaragua and then come across the border. And then what I learned, and I didn't [00:31:00] realize this until they did all the work too, is there's These organized asylum policies that are like, okay, if you're Cuban, your communities in Miami, we're sending you to Miami, we're sending you to Des Moines.

Nobody's written about that, but that was really fascinating to me that that's how we were seeing these communities develop all over the country.

Ben: I mean, I've read so many articles and no one ever sort of explained to me what was happening. So I'm just going to recapitulate something I heard your team say that almost a couple million people would come across the border, get caught. Then they declare themselves asylum. And that gives them a temporary work visa after 30 days.

Now. And then they have to wait for their asylum court case, and that court case can be two to three years away. So basically they get two to three years of working in the United States legally until their asylum case is heard. And I don't really know what percentage of those are accepted or rejected, or if there's appeals, I don't really [00:32:00] know the stats there.

But that's just sort of like a really simple, oh, well, of course, that's a policy, it's pretty specific around asylum, that is responsible for almost all of The change in immigration numbers,

John: You know, the new administration could have changed the asylum policy. I think the current administration changes. So I think it's a lot longer than 30 days to get a work permit here now. In fact, I was just spoken Denver and the mayor of Denver spoke before me. So this is his information. He said he had more than a thousand people in downtown Denver from Venezuela for whatever reason.

And he was meeting these people. One was a policewoman and they had a shortage of cops in Denver. And he was like, I want to hire you. And he couldn't. Instead, they were costing him a fortune to help house them in things. There are a lot of policy maneuvers here. We're not a policy shop. There's so many great policy shops out there.

Our goal is to help businesses. You tell me what the policy is going to be, we'll figure out what we think the impact is going to be.

Ben: just [00:33:00] understanding the mechanisms and the numbers and the change you got on my radar originally. Cause your demographics analysis and you have this wonderful chart that has broken all of the generations into 10 year cohorts, and then you name them and you have a colorful framework. I just love it. I think it's actually better than, cause every time we talk about boomers versus Gen X.

I'm a Gen Xer, but I was born right at the end of Gen X, and then there's people who are nearly 20 years older than me who are considered Gen X. So it doesn't, it doesn't really make sense, the different eras. So you just changed it, and I just think it was really thoughtful, and I'd love for you to walk everybody through it, and maybe to share some of your favorite insights or surprises from doing it that way.

John: We did this because we had to figure out what was going on in the housing market. And one of the ahas for me was, wait a minute, the boomers, that's a 19 year definition. The Gen X is a 17 year definition. Well, of course you compare 19 years of birth to [00:34:00] 17 years, they're going to be bigger. And how can you generalize to say somebody born in 1946 and 1964 has a lot in common?

One's 81, one's still working, is still 60. So we broke it into 10 year cohorts. And, it's all, everything's 10 year, 10 year, 10 year. By the decade you were born, nobody argues whether you're Gen X or whatever, because you know what year you were born. We use that framework to then study history to help project the future, if you will.

There are a couple findings, one we call the 4 5 6 rule, but there are basically four things, and I use the acronym G. E. T. S. to help me remember it, but it's government, policy, economic cycles, technologies, and societal shifts, usually during somebody's teens and twenties. that changed their future. I wrote a whole book on this eight years ago, so I could go on and on.

But immigration is a great government policy example. We're talking about that. Let me give you a good example. So 1970s was a baby [00:35:00] bust. The baby boom ended. We have very few births in the 1970s, but we had robust immigration policy during the 80s and 90s. And now all that bust has been filled in by immigrants.

Here in America today, 23 percent of the people born in the 1970s were actually born in another country, for example. So we didn't have that boom and a bust that everybody was forecasting due to immigration policy. Economic cycles, those born in the 1980s graduated right into the great financial crisis.

Good luck. We nicknamed them the sharers because they essentially figured out how to share things for financial reasons. And they started Airbnb, which was sharing houses, and they started Uber, which was sharing cars. That was it. If I grew up and I told my mother I'm going to get in a stranger's car, she would have said that's stupidest thing I've ever heard of.

But there's an economic cycle and technology impacting things. Birth control pill ended that baby boomer. There's a big technology one. The number of brilliant multi billionaires born in the [00:36:00] 1950s. Because they timed it exactly when the PC took off. The Bill Gates and them, we call them the innovators.

They drove dual income households. They drove a lot of entrepreneurialism. The later generations didn't. I was born in the 1930s, my parents generation, we called them savers because they learned to save during the Great Depression. But they also more than doubled the divorce rate. And created a lot of household demand with divorces.

And so we pay attention to all these things now and kind of wondering what the future holds. I'll shut up right there. I could keep going on and on. It's fascinating.

Ben: I want you to keep going on and on, because I love it. I'm obsessed with demographics. They're the engine of history.

John: They say demographics is destiny because you and I both know we're going to be a year older, but we don't know what these government policies are and the economy is going to be and the new technologies and things. And so that's what's fascinating about it to me is there is some uncertainty there.

Ben: The biggest thing happening in demographics in the United States and in the world is [00:37:00] that birth rates are slowing, fertility is falling. The population growth is either declining in the West or anemic. You said it earlier, people who are 18 to 63 or 1865. And those are the people who work and pay taxes and support kids and retirees in the society. And that number pretty much been the same number for almost a decade, pretty flat.

John: It's been barely growing. It just coincidentally, what caused it to fall was in part the birth rate, but more importantly was the retirement rate. Those born in 1946, the beginning of the baby boomers, started retiring 10 years ago. And that was perfectly predictable. That's what's been causing the strain in the labor force.

And we said, we think this is inflationary because if you and I are going to have a tougher time hiring people, that's going to be upward pressure on wages. And that has been playing out.

Ben: And sort of [00:38:00] never any sustained period has there been flat or falling population growth. I mean, you'd have to go back. to the 1400s or something, where there was a century of population decline.

John: Well, I look at Japan the last 20 plus years, low interest rates, low inflation, low growth. We're talking about the housing market here. There's four Japanese home builders that have bought 34 American home builders in the last decade, because there's no growth in Japan. So they're coming here for the growth.

And even though we're talking about anemic growth, it's better than Japan.

Ben: How do you think about, then, the impact of these demographic shifts? You see them as deflationary or inflationary? Because you just said inflationary, but Japan was deflationary. How should I understand that?

John: This is going to be about my pay grade to labor tightness is inflationary because if you have to pay more for labor, but lack of labor force growth is also not [00:39:00] very good for the economy, which is more deflationary. Okay. So, it's above my pay grade, whether or not this is net net a positive or negative.

That's why J PAL gets paid. It probably doesn't get paid that well, but it gets all the headlines.

Ben: But for housing, right? It should be bad for housing, eventually.

John: Less adults with jobs is bad for housing, without a doubt.

Ben: I've been thinking about this for a decade as well. The other place I thought it would impact is supply of money. The money supply or wealth creation is to the wealth composition is driven by demographics in some ways it sort of hasn't a lot of these demographic changes haven't really hit the US economy.

I think they're hitting now, Europe and Japan and Korea. So you say it's destiny, but at the same time you feel it's uncertain. Are there certain things you feel like are more certain and certain things less certain? Obviously government policy is extremely uncertain in [00:40:00] your list of societal shifts, economic cycles.

How do you navigate all of this as you think about consulting to all of your clients?

John: I felt very certain that we were not going to get back up to 2 million homes built per year because the demand wasn't going to be there, and I've also seen the problems on the supply side. And there were a lot of people that were saying, and particularly building products companies that were ramping up their plans and things for that.

We're going to get back to that. And a lot of industry pundits and lobbyists who are calculating like six, eight million under supply because they thought that's what we needed to be building. That was not the case. There are a lot of like under supply calculations that were way too high. For that reason, our number is 2 million.

We think we're undersupplied. We were oversupplied by about two, a little more than 2 million 10 years ago. So we went from being oversupplied by two to undersupplied by two by building virtually nothing.

Ben: I've seen a lot of reports and people talk about the undersupply of housing. I can understand it [00:41:00] in San Francisco. Like I understand it in certain cities like New York, can't build housing. And California is so difficult to do anything. How do you think about it nationally? And then Where does that number come from, 2 million?

John: We all come up with different numbers, but some people's goal is to report something different than what somebody else is reporting. Could you build a hundred thousand homes in Manhattan, in San Francisco and 200, 000 and sell them all? Yes. We adjusted for the normal affordability. Manhattan's expensive, San Francisco's expensive, Dallas is less expensive.

We looked at the history in those markets and we said, okay, how many adults per household are usually in the house? And we actually looked at it by the age of the head of household. So we looked at it for 30 year olds, 35 year olds, 40 year olds. And so we've done it by market and actually in San Francisco and Manhattan, it's not as undersupplied looking at that way as you might think, because it's been a lot of second home buying.

[00:42:00] Riverside, San Bernardino came out on top there as the most undersupplied market compared to its history because there's more adults per household than there usually is in Riverside, San Bernardino right now, where there's been very low supply. And then we looked at a completely different way. We kind of said, well, how much vacancy is there?

So usually if there's a lot of vacancy, you'd be oversupplied and less than normally you'd be undersupplied. And Riverside San Bernardino came out on top there. Looking at each market compared to its history of adults per household and vacancy, it's Riverside San Bernardino. That's also a very expensive place to live.

So could you build 100, 000 homes at 100 grand and sell them all? Absolutely.

Ben: Let's just shift to rental market for a second because we own almost 20, 000 apartments built for rent. I think we are one of the bigger owners of built for rent, 5, 000 units. The rental market surprised us as well because there was going to be this massive [00:43:00] oversupply of new apartments delivering this year.

The demand soaked it up. Because interest rates are so high, people are renting, and because of immigration, and it seems like a year from now, that supply spike will be absorbed into the market, and then we'll go from, uh, Oversupply to then back to undersupply because you can't build housing anymore because interest rates are so high, at least you can't build rental.

No one's building rental that I know. So there's the broader rental market and then there's sort of this new asset class of build for rent. So I'd be interested in your thinking or your summary of both what you think is happening in the rental market. How do you think it plays out? And then maybe looking at the sub sectors of apartments built for rent or anything else you think is interesting.

John: There's been so much misinformation there, too. There is no big company owning a lot of scattered single family rental homes before the great financial crisis. First of all, because you couldn't go buy them at way below replacement costs like [00:44:00] happened. But also, this goes back to technology solution. You now can sit at your desk and figure out exactly what a home value is and what the rents are.

And tell somebody at an auction in Atlanta, here's what you can pay. That did not exist before. And see all the photos and everything. Then you can manage these things with technology too. I would encourage people to think of this scattered home phenomenon and the big companies getting big as tech enabled that to happen.

If you can manage a thousand homes all over Atlanta, all built at different times with different appliances and everything, Well, how much easier would it be to manage a hundred homes all built brand new with the same appliances and all right next to each other, just like an apartment complex. So, I think the technology from Scudder proved that you could have homes.

And then Build2Rent just became the next product type. I would look at that as a consumer choice. So, there's 29 million apartments out there, but there are 11 million [00:45:00] detached rental homes. Where you could not rent from a professional company and you couldn't rent anything new because nobody was building it.

I think this bill to rent could be about 40 percent the size of the apartment market. Cause that's how big the demand is. There's always a percentage of people who can afford more for something new and would rather do it. And so I think it makes a ton of sense. Right now, though, just like the apartment mark, costs are up 40 to 50 percent from five years ago.

The borrowing costs are up. The expenses are growing faster than the rents. The timing is not great for Bill to rent right now, but I think the long term future is phenomenal.

Ben: So you're talking about potentially millions of built for rent homes being built

John: We were building, on average, maybe 400, 000 apartments per year. So, could we get to the point where we're doing 40 percent of that on single family homes and 240, 000? I think so.

Ben: from essentially almost nothing.

John: [00:46:00] Yeah, from like 50.

Ben: Wow.

John: That's when we get to a mature industry where we have a ton of companies and great financing and GSE financing and all the stuff we don't have today. So that's way out in the future, just to be clear. If there's

Ben: We own apartments, we built apartments, we built built for rent, we own built for rent. I mean built for rent has a lot of the advantages of apartments and operations and efficiency and financing. And then it lives like a house. It lives actually a little bit of both because people have their lawns mowed and they have pools and all these sorts of things that are amenities in apartment buildings that are not typical for homes.

We're seeing it as the best of both worlds for the product.

John: 11 million people that rent homes to build 200, 000 a year of new ones every year, It's not ridiculous. It's a different consumer. It's somebody who's got kids. It's somebody who wants a yard. It's somebody who has three dogs. It's just somebody who doesn't want to be in an [00:47:00] apartment complex for their lifestyle versus home ownership.

Not everybody is ready to own right now. You just moved to an area or you're saving for a down payment or you just got divorced and you're sharing custody. I mean, there's so much online that this is some sort of anti home ownership thing that you're building. Right. The user's like, no, you're building for this sub segment of renters who's looking for a rental right now, and it'll probably be a homeowner someday.

Ben: We're competing with apartments.

John: The lower density stuff, there's a lot of built to rent, which is more like cottages, some of them don't even have a garage. Yeah, there's a lot of definitional things you can get into there that I feel compete directly with apartments. That's just a lower density apartment, if you will. There's actually more of that, I think, than actually the detached homes.

Ben: I mean, the other thing that really drove it for us, I think. is underappreciated societal change is remote work. And speaking of technology, I think you guys have written about this. I would love for you to sort of tell [00:48:00] me how you think about remote work and its impact over the next. Five years.

John: We were on Zoom before COVID. I've been a big believer in I just want to find the best person, no matter where they live. They can go into an executive suite if they want, or they can work from house. There's a huge demand for a lot of reasons for this flexibility of not coming into the office. I can actually become a homeowner now because I only have to commute a long way three days a week, or I can move across the country to someplace I can afford.

And me as the employer doesn't lose a great person when they do that. I'm able to retain them or from a recruiting standpoint. We just did a CFO search last year, and I really wanted to find somebody where I lived in orange County. We just kept coming up dry and we found a great person in Nashville and he's working out great.

I think this is an affordability solution that is completely not represented because think about what I just talked to, I've had employees moved to South Carolina. From California or have one going to Alabama this year because he grew up [00:49:00] there and he's got to go be with family. Amazon had everybody go back into the office.

I picked up two Amazon employees. One's whose family is from Cincinnati and he's staying with his wife's family in Cincinnati. I mean, Amazon had no hope of retaining him and I got him. I'm a big believer in this and you just have to work differently to build a culture. I spent more on travel getting us together.

I spent more on training and communication and Zoom type of things. So it's not all positive, but if I really make sure that I'm just hiring the best people, then you never have a problem when you're hiring great people.

Ben: And so when you extrapolate that out to the impact on housing and the economy, what does that mean?

John: It's great for the home builders because people can now move further out and guess what's further out land where the home builder can build. So I think this is a permanent shift to help the home builders take more market share. Like we talked about earlier. Because a lot of times, people weren't willing to commute 90 minutes [00:50:00] to where the new home was.

But now, I'll do the 90 minutes three days a month, and they're getting more for their money. And what has really surprised me the most was how much people are willing to do that to rent. Hey, I have a family now, and I can get in a good school district further out while we're saving for a down payment, or my spouse can stay home with the kids now.

There's been a lot of, you know, Lifestyle reasons that people are migrating further from the urban urban core for affordability and getting more for your money. I do not see that reversing because again, this is tech driven. How long have we had high speed internet in everybody's house? Not that long.

You and I are sitting here right now with a 200 camera and a 150 microphone. You just get that from all your employees. It's not that expensive. We couldn't have done this 15 years ago.

Ben: We also own 10, 000 housing lots that we have worked with home builders and they [00:51:00] Been taking them down hand over fist twice the rate that we forecast So I've been seeing a lot of money pouring into land a lot of private credit It just seems like land has become institutionalized recently where it wasn't when we started four years ago.

Is there a land rush happening?

John: Things have changed a lot there. Some big Wall Street firms, kind of with high yield bond groups, have said, we can structure this like high yield debt for our investors and structure in a way. Where the odds of them not getting their principal back are very low, which is how they've looked at it. The home building industry has changed a lot.

So the home builders have used the boom that just happened to create phenomenal balance sheets. I mean, most of them can pay off almost all their debt with the cash in the bank right now. So these are not the same companies that we had in 2005, 2006. And Wall Street has said we love return on equity and the poster child for this is [00:52:00] a publicly traded company called NVR that's headquartered in D.

C. and just in the East Coast. They don't have any land on their balance sheet. They find some land, get somebody else to buy it for them and agree to pay them a percentage of the amount they paid to hold it for them until they need it. So they're perfectly insulated from a crisis. And what they found is that, well, that allows me to control a lot more land.

Because I'm not using all my cash to buy all this land, I'm getting somebody else to use their cash and paying them a return. Then the other part of the equation, so yes, there's a rush for land, but I'm not going to say it's a crazy land rush because the problem has been on entitled land. There's not been a lot of money going into getting land approved and putting in the sewer and infrastructure because the local headaches there have just been horrendous and there's very little private equity going into that.

Some of it, but there's not a lot of entitled land for the builders to bid on. So when you're selling something, yeah, there's 10 guys that are going to [00:53:00] say, that's a rare commodity that I can actually build homes on. And I've got a great balance sheet. I'm going to get in a bidding war, but at the same time, they've also got themselves way more efficient as companies and builders now too.

And even though they're big, Spending a lot of money buying down mortgage rates to help sell homes. Their margins are above normal, their profit margins, so they can afford it. I think this is a real problem for the private builder who can no longer compete. The big builders have the scale. The big builders are now up to 58 percent new home market share.

And I include all the publics, plus the subsidiary of any publicly traded Japanese or Berkshire Hathaway company. They don't need to go to the bank and say, I need a construction loan. They can get, do whatever they want. I

Ben: Yeah, I hadn't thought about it that way in terms of returns to scale or this dominance of the big players happening in tech, it's happening in banking, it's happening sort of in almost every sector where there's Benefits to infrastructure [00:54:00] and benefits from being bigger. Mostly it seems like on a macro basis, you end up with more homes and a healthier housing market on a micro basis.

And what's the consequence if the private builders are just get squeezed? What are the negatives?

John: mean, it's not good for their business. It's not good for the construction lenders. They're learning market share. It's. I think even the trades that build those homes, the bigger trades are the ones that are winning out. Now we're seeing consolidation there. So the benefit is that bigger companies are building bigger houses, better houses, more affordably, which helps the consumer and helps them.

And if you're not one of those big companies, it's hard to survive. And I mentioned all the Japanese buying those 34 home builders. That's why a lot of private builders are selling right now. And by the way, they're also selling at a tiny profit too. So it's not a sob story for them.

Ben: let me just try to see if I can summarize this up or maybe you could, but the housing market on balance seems pretty healthy.

Your [00:55:00] forecast, I'm going to say it looks like three to 4 percent in most cases, and so you seem relatively optimistic considering. Well,

John: I am, but I want to go back and I think it's always important to remember that there is this dark cloud hanging over us. If a recession hits, if and when a recession hits and housing does not have an affordability problem, we get through it fine. When housing has an affordability problem, it could be a disaster.

So I can't find what the next Lehman brothers like event is, or the 1989 fire react by government. We're not finding it. I'm asking for it. You're in the ownership market. There's been a lot of private lending out there too. I wonder, is there a bit of Michael Milken out there type stuff too, but just the crazy lending of the early eighties.

And that's why I bought into Jamie diamond and James Gorman and David Solomon saying, Oh, they must see the crazy loans. I'm not making this forecast with a ton of confidence, but [00:56:00] because I see the issues out there, I'm just saying this is the most likely scenario and make sure you've got a great balance sheet.

And frankly, that's what our companies are doing. Their balance sheets have never, ever been better. So some of them are actually saying, Hey, I like this 7 percent mortgage rate. It's keeping the resale off the market. And I don't mind this level of competition. And when the recession hits, I'm just going to be in a great opportunity to acquire things at a discount.

That's how I'm running my business. And that's how I think other people should be running their business. Have the same risk profile I do.

Ben: John Burns, thank you for joining us. I really appreciated it.

John: Thanks, Ben. You always bring up a couple of great points. I appreciate that. I learned a lot.

Ben: Onward.