Transcript
Dean Wehrli:
Welcome to the inaugural John Burns New Home Insights Podcast.
John Burns:
The first one.
Dean Wehrli:
Very, very first one. This is it. I’m your host, Dean Wehrli and my guest today is…
John Burns:
John Burns.
Dean Wehrli:
Yes, which is very… since it’s the John Burns Real Estate Consulting Podcast.
John Burns:
Who puts their name on a company? Must have a huge ego.
Dean Wehrli:
Huge, gigantic ego. We all know that about John. Typically on this podcast we’re going to bring you lots of interesting insights and findings and usually they’re pretty specific. Today though we’re going to do something a little more general than we usually do, and that’s John is going to talk about the state of the market going forward, kind of the official thoughts on how the housing market and housing cycle is going to play out here over the next couple of years. So, I didn’t want to do… okay, everybody always does the classic hackneyed, what ending are we in? We all hate the word ending, so I’m going to completely change that up for you. Ready? Let’s say that this is a game of bowling. John, what frame are we in?
John Burns:
Oh, you can’t go past frame 10, can you? So there’s no extra endings analogy anymore. I think we’re behaving a lot like we usually do and not like the last cycle in that every market is playing out very differently. So, my answer to your frame question is very different and I can put some math on it. There’s 33 large housing markets we pay the most attention to. 15 of them are in the part of the cycle we call the maturing part of the cycle, which is basically getting toward the end. I can name them if you want, because people probably care.
Dean Wehrli:
Well, if you want.
John Burns:
Only if your markets are not in them. Right?
Dean Wehrli:
Yeah, that’s what I’m thinking.
John Burns:
So, these are the markets that have had a really great run where our clients have done really well, where there’s been a lot of price appreciation, and some of them supply has ramped up quite a bit. And because of all those fantastic things, they tend to be mature.
Dean Wehrli:
Yeah.
John Burns:
So, Austin, Boston, Dallas, Texas, Denver, San Francisco, Bay area, all the markets around San Jose and the East Bay.
Dean Wehrli:
Near and dear to my heart.
John Burns:
Yes. But you’ve had a great run.
Dean Wehrli:
Yeah.
John Burns:
And you’re still having one.
Dean Wehrli:
So, people are thinking right now in those markets you just named, when you say you’ve had a great run, they notice you said that in past tense. I mean, do you get a sense that those markets are ready to play all the string?
John Burns:
No, and every market’s a little bit different. Dallas is starting to slow a little bit, Austin starting to slow a little bit. Some of them I’m concerned about. What causes the cycle of boom and bust really is the economy, and the economies are fairly strong in all of these markets. Then when the economy slows, if you’ve built a lot of homes, you can have a lot a big downturn, and clearly in the San Francisco Bay area, Marcus, we have not.
Dean Wehrli:
Yeah.
John Burns:
Or if you’ve priced things to the moon that it’s affordability even an expensive market is completely out of whack. You can have a big downturns.
Dean Wehrli:
So, okay then supply is a pretty critical part of how a market in a specific market area is going to play out. Do you see that then some of those sunbelt or smile markets that had been doing so well, but it’s easier to build there and they might have a supply. I don’t want to say the word glut, but as things ease back, do you think that could impact those markets that have easier supply?
John Burns:
So, for example, in Austin and Nashville and Dallas, I’m concerned about the level of supply in those markets, particularly on the rental side of the business and particularly in great locations. Those economies have been strong. They’ve built a lot of homes to meet the demand and they haven’t kept up, but now they’ve caught up and things have gotten very expensive, so those are mature markets. Some of the other ones I didn’t mention are down here in Southern California, like Orange County and San Diego, very supply constrained, particularly in San Diego. It’s just crazy how little housing is going on there. I think that’s a permanently more expensive place to live, but when a starter home is $500,000, not a lot of people can afford a starter home, and so that’s the concern there.
Dean Wehrli:
In San Jose, that’s under a bridge.
John Burns:
Right, that’s the down payment.
Dean Wehrli:
If you’re lucky.
John Burns:
But the other 18 markets are in fine shape. In fact, six of them we think haven’t really even or are just starting the recovery.
Dean Wehrli:
What are some of those?
John Burns:
San Antonio, Washington DC, Philadelphia suburbs, Minneapolis, Indianapolis, Chicago. Now, those have been tough, haven’t been so great to the industry, and that’s why they’re not mature.
Dean Wehrli:
DC’s surprising to hear that on that, cause that seems like it has been pretty strong. Chicago I would expect it, but DC is a little surprising.
John Burns:
DC is a bit surprising to me too, and it’s been surprising to Dan Fulton who leads our office there. That market has just not had a lot of price appreciation. This entire recovery going on, the first year out, maybe 2012, it did, and then it’s been growing at the rate of incomes ever since. Supply has not hockey sticked, but there’s been enough supply to meet the demand.
Dean Wehrli:
Was it sequestration? Remember that? With the budgets, because budgets have been loosened in the-
John Burns:
There’s been a lot of that, and then people, I think the defense contracts that get let every two years make a big difference, and those budget deficits and fiscal shutdowns make people concerned. If I had a consumer confidence index by market, I’d say DC would be below average. I think Chicago would be the worst, actually. People are really afraid of what’s going to happen to their pension plans and their state government in Chicago.
Dean Wehrli:
They’ll still have the Cubs.
John Burns:
They’ll still have the Cubs.
Dean Wehrli:
That’s a silver lining, glass half fall.
John Burns:
Yeah, no, you’re right. But that’s what I mean. All these markets are behaving very differently, Dean, so different frame by market.
Dean Wehrli:
Take us through the next couple of years. I know this is your crystal ball and this is the hardest thing to do, so we’re going to ask it anyway on the spot.
John Burns:
When you forecast, the first thing you know is you’re going to be wrong. You hope for half the time you’re too high, half the time you’re too low. All of our clients though are making bets on the future. So, even though they’re not publishing their forecast, they’ve got one in their head. We have some clients that are saying, “Now’s a good time to sell my company.” We have other clients that, “Now’s a good time to buy other people’s companies.” So, everybody’s got different forecasts. They’re different.
Dean Wehrli:
Their company, not just assets?
John Burns:
Right, right. Well, there’s a fair bit of M&A going on.
Dean Wehrli:
Yeah.
John Burns:
And so you have M&A, you need buyers and sellers. So, we’re seeing both. But we think the economy is continuing to grow and going to continue growing at a relatively slow pace, two to three percent GDP growth here for the next few years. We are running out of people to employ. That’s why I don’t think it can grow much faster than that. The surge in people that are hitting the retirement age and retiring, about three quarters of people who are turning 65 are actually retiring, and that’s causing a drag on our labor force growth.
Dean Wehrli:
Yeah. I mean, of course that’s hit the housing market more than maybe any other sector in the country over these last five, six years. Is this labor shortage.
John Burns:
Yeah. You’re seeing a shortage of labor, and the most surprising thing to all the economists has been the lack of income growth that has happened, not at our company. I think we tend to be dishing out pretty good raises because we’ve got some great people that are in high demand. So, we think we have some solid growth ahead of us.
Dean Wehrli:
Do you think there’s income growth ahead? I mean, everybody’s been saying that for at least two, three years.
John Burns:
We’ve been saying it for four years and we’ve been too early is what I’ve been saying.
Dean Wehrli:
Do you think it’s fine to open up that tap a little bit?
John Burns:
I think it is, and it really surprises me that the data is not showing it. I mean, we’ve had some people leave our company for big raises. I’ve hired people from other companies for more big raises. Walmart is doling out bonuses and paying above minimum wage now though.
Dean Wehrli:
Minimum?
John Burns:
Well, those things don’t happen in a seven percent unemployment economy. They happen in three or four. The other thing I think all of us employers learned during that downturn is your best people are worth a lot. So, we’re all doing everything we possibly can to retain our best people. That includes compensation, that includes flexibility, that includes opportunities to grow and learn. It’s everything.
Dean Wehrli:
It still is surprising that we haven’t seen… I know every economist it seems in the country has been shocked that income growth has not been a factor, and there’s 10, 15 explanations for it, but no one really knows.
John Burns:
Yeah. And some of the data’s misleading. I think some of the surge in retirement is dragging the data down because somebody making a lot of money is retiring and being replaced by somebody with less experience. If you look at the ADP data, which is the best out there, they’re showing about four percent wage growth year over year for the same people.
Dean Wehrli:
Oh, I see.
John Burns:
So, I think it’s running at about four. I’m expecting it to go higher than that.
Dean Wehrli:
And we need to see it higher in some of the stronger housing markets like the Bay area, Orange County. Income growth has been much better than-
John Burns:
Right. Well, and you mentioned the builders, the construction and labor are certainly getting more than a four percent raise these days.
Dean Wehrli:
And there’s still baristas in Starbucks because it’s a hard to build homes.
John Burns:
It is hard.
Dean Wehrli:
I think that’s a huge part of what’s happening for them.
John Burns:
You and I don’t build homes for a living. That’s hard.
Dean Wehrli:
I would cry every day. Okay. Greatest challenge ahead. What’s the biggest headwind you see coming up?
John Burns:
I mean, the thing I lose the most sleepover is what I don’t know. But what I do know is just how the federal government’s balance sheet is just so upside down with these deficits and debt. But what I don’t know is how that plays out. I’ve read so much about that, and there’s that book by Reinhart and Rogoff, This Time is Different, which is an excellent academic study that says this never plays out well. They did 800 years of history, but you just can never call the timing.
Dean Wehrli:
Yeah.
John Burns:
So, I think the biggest headwind is uncertainty around monetary policy. The other thing we’re paying a lot of attention to is the economy. A lot of people tend to think, “Boy, housing is the cause of downturns.” The housing market is still recovering. The housing market, in fact, if I was going to look across all sectors of the economy, it’s got to be one of the healthiest. The home builders, the publicly traded home builders, they have only 30 to 40% debt to cap ratios. They’re very well capitalized. The banks have lent very conservatively to the private builders. It’s not housing that’s going to cause a debt. And the mortgage industry, although it’s starting to loosen quite a bit right now, is still tight in some aspects, particularly on documentation. So, I’m looking to other industries that have not had a downturn that have been growing like crazy and borrowing too much money. Healthcare scares the crap out of me. What’s going on with some of the tech companies and how they get valued at multiples of revenue, and the bigger the disruptor, the more you’re worth. But so many of them aren’t even making any money and don’t have plans to be profitable anytime soon.
Dean Wehrli:
You don’t have to be. Why would you?
John Burns:
Well, they said that in 1999 and that didn’t change either. You and I are old enough to remember that. So, those are the types of things I’m paying a lot of attention to.
Dean Wehrli:
Yeah. We all remember shop.com. What was the grocery one?
John Burns:
Web Van.
Dean Wehrli:
Web Van, that’s right. A personal favorite for those guys. I think I left you off the hook though. Going back to take us to the next two or three years, let’s get the appreciation. Everybody loves price. Price is a key indicator. What do you think?
John Burns:
Our best estimate of the demand supply imbalance and our estimate of rising rates, and we do it by market, but we roll it up for the entire country, is about six percent price appreciation for the country.
Dean Wehrli:
For calendar 2018?
John Burns:
For calendar 2018 and ’19.
Dean Wehrli:
Okay.
John Burns:
And if you look just at the affordability and income growth, you’re saying we shouldn’t be doing that. But the demand supply imbalance indicates to me that that’s the most likely scenario.
Dean Wehrli:
Yeah. I mean, that’s the biggest difference, right? Between this time and last time is that supply has been pretty constrained across almost every market.
John Burns:
Supply has been really constraint. I mean, this recovery for housing is a lot like the nineties recovery where it got wiped out by the SNL debacle. It took a long time to build back, and we’re doing the same thing. In fact, we’ve charted the U.S construction volume growth against what happened in Southern California in the early nineties and Houston in the late eighties. It’s growing at the same pace.
Dean Wehrli:
Yeah.
John Burns:
But what’s different this time, Dean, is the lack of resale supply.
Dean Wehrli:
Yeah.
John Burns:
And so if you’re trying to buy a home, there’s far more people bidding on the home than there are people selling homes, and that’s what’s driving prices up.
Dean Wehrli:
And it seems like that is particularly true in the entry level market and in the entry level niche of the market in most markets. That’s a sector that is very, very difficult for the new home builders to build in. It’s too expensive.
John Burns:
That’s one of the reasons why we’re not building more, is that if the home builders could build and sell homes profitably for $200,000, they’d be doing it and we’d be building a lot more homes. But the low… Jodie Khan who runs our surveys did a great piece on this about 18 months ago. She surveyed 100 builders and said, “Tell me some examples of costs you have today that you didn’t have 10 years ago.” And it was just one local example after another where, “We want you to sand bag all around the properties. We want four sides of architecture on the house. I know I told you I want a bridge, but now I want that bridge built to freeway standards,” and just all sorts of things that have made it really hard for them to make money at a lower price point.
Dean Wehrli:
I remember that. It was eyeopening. Some of those answers, I mean, obviously they use it as a vent. Well, rightly so, but some of those answers went on for a page of tightly typewritten email. It was amazing.
John Burns:
The builders are pretty passionate about some of the unpleasant surprises they’ve gotten.
Dean Wehrli:
Yes. Okay. Let’s talk about, going ahead now, who and what might be the winners and losers in terms of product or price niches or parts of the country or anything like that. What do you…
John Burns:
Yeah. We spent a lot of time trying to figure out the winners and guide our clients there. That was one of the reasons we wrote that book called Big Shifts Ahead. We did a 9,000 hour research project on demographics.
Dean Wehrli:
Yeah.
John Burns:
I’ll never break even on that.
Dean Wehrli:
I think it was more than paid for itself.
John Burns:
There’s four real opportunities we identified. One, I was pretty much accused of being crazy, but now people are starting to come around, which is this building homes for rent.
Dean Wehrli:
Yeah.
John Burns:
And it is more okay than before to be a renter. Some of the incentives to own such as tax deductions have disappeared, and people are saying, “Well, 11% of people already lived in a rental home, but there’d never been an institutional landlord with a 24/7 call center and real professional service.” And so we’re getting that now and people are building brand new homes for the sector. The second opportunity was, and you helped us come up with it, Dean, because you noticed how in some of the suburban locations you work in, we’re starting to see urban housing. And so we coined the term surban, which is bringing the best of urban to the suburbs. But it’s basically high density, good location, walkable or at least a short drive to everywhere you need to go, less crime than the urban areas, better schools than the urban areas, more affordable than the urban areas. The cities are wanting to clean up their little city, and so they’re approving these types of projects.
Dean Wehrli:
It’s funny you say that because our next two podcasts will be on literally single family rental and surban.
John Burns:
Well, it is the opportunity, so we’re seeing a lot of that. Then the other two opportunities are really demographic, and we’re calling it the barbell. This is perfectly predictable because there’s nothing more than calculating we’re all going to be a year older next year. There’s going to be no growth in households headed by 45 to 64 year olds, which is your traditional move up housing and even second home market. None. Slight decline. Now, you go to the Southern markets, maybe it’s slight growth, but generally that’s true. 3.3 million more households over the next 10 years under the age of 45 and 10 million more households over the age of 65, and most of this is based on us all aging in place. This is not based on immigration, even though our immigration stuff is factored into this. The resale market has a lot of entry-level homes in it, but we still need more. It has a dearth of homes constructed for people over the age of 65, so we’re coaching our clients, “Go after that.” But there’s a lot of great family homes out there, but there’s not a lot of great homes for couples who are empty nesters. Single story is the stereotype, but we’re even finding a lot of them are perfectly happy with two story, and in even some cases, three story.
Dean Wehrli:
We found that a lot too. A lot of the Surban that is actually… you’d think of it as younger suburbanites, but it’s been very successful with move down buyers there too. It’s lower maintenance, they still are the place they want to be and they have their connections, et cetera.
John Burns:
Yeah. So, that’s where I have the most confidence you’re going to have success, build for rent, surban entry and retirement. The losers are the builders that are pulling out the same old floor plans. The world is changing so quickly now and consumers can see what’s going on all around the country instead of just in their own backyard, and so our clients have been telling us, “Hey, I used to be able to get away with just building whatever was going on in the Philadelphia region, but now my clients in Philadelphia are saying, “I saw you built this home in Houston. I saw you built this home in California. We want some of that.” I think people are paying… well, I know people are paying a bigger than ever premium for new if it comes with the technology that they want and the design that they want. It’s just so much better than a resale home.
Dean Wehrli:
So, it’s not just new, it’s new and different, and different being…
John Burns:
Well, yeah. I mean, the definition of new is just it was built recently. Right?
Dean Wehrli:
Exactly.
John Burns:
But if it was built recently but the floor plan was stale, the guy who’s got the better floor plan, even energy efficiency in the home. One of our clients in Denver had great success. He got certified for the clean air in his house and he’s been selling that as a, why would you raise a child in a home with dirty air?
Dean Wehrli:
Wow. That’s coming for the jugular there a little bit there. You want to kill your child? Do you love your children?
John Burns:
Oh, he’s got a great ad of this woman feeding her baby organic baby food and saying, “You wouldn’t put dirty food in his mouth,” basically is what he’s saying. Why would you put dirty air in his mouth?
Dean Wehrli:
Can you guilt someone into buying a house? I mean, I guess he can.
John Burns:
Probably.
Dean Wehrli:
Well, if it works. Who else might be… any other losing sectors you’re worried about or parts of the country or anything?
John Burns:
Well, I mean, that’s the design oriented one. The question I’m getting asked a lot is what’s this new tax act going to do particularly to New Jersey and California where the property taxes are high, and are you going to see a lot of people move? Our team down in Florida has seen some of it, and it’s been more anecdotal, and sales offices, people move from the Northeast to Florida all the time. I think what’s happening is people are maybe moving a little bit earlier than they thought. I haven’t quite got my arms around the California Exodus yet because there’s always been a domestic migration Exodus out of California except for the tech workers, if you will, and back filled by immigrants.
Dean Wehrli:
Yeah.
John Burns:
That is still going on, but we haven’t seen a pickup in demand in Texas where a lot of been going. Maybe we’ve seen a pick up in demand in Arizona, Nevada, so maybe there’s a little bit of it, so we’re keeping an eye on it.
Dean Wehrli:
It seems like a lot of that, of course, is fueled by price. I mean, California is the most expensive market and Texas has gotten a lot… it’s still relatively affordable, but it’s gotten more expensive. I wonder if that is part of what you’re seeing, California is still gravitating toward those comparatively lower cost states?
John Burns:
Right. That’s been going on forever. But then this tax act would hit the higher price points so that the mortgage deduction is capped at 750, you can’t deduct state and local taxes, and the marginal tax rate in California is 13% now, in Nevada it’s zero.
Dean Wehrli:
Yeah.
John Burns:
So, that does make a difference.
Dean Wehrli:
That feels tremendous. We do a lot of work in Reno, and that feels tremendous demand in reno is those California tax escapees. But I’ll say this. In the Bay area, those high end buyers have not bat an eyelash. Quite the opposite. They’re thriving more and more.
John Burns:
The Exodus to Reno is how big? 1,000 people a year? I mean, it’s not enough to move the needle, I don’t think.
Dean Wehrli:
Not at all, yeah. But still, Reno loves it.
John Burns:
Sure. That’s 1,000 more than they would have got.
Dean Wehrli:
And they have money and they go crazy on options. So, anything else? Tell me what it’s like… okay, and by the way, I want to thank John for coming in. Our original guest here was going to be Melania Trump, so I really appreciate you pinch hitting for her.
John Burns:
[inaudible 00:22:43] lucky.
Dean Wehrli:
It was coincidental that we’re going to talk about John Burns prognostications with Melania, but we got John instead, so I appreciate that. What do you see? Tell us about running a housing company in kind of pretty crazy market days where we have this fluctuating, hard to handle, hard to get ahold of kind of market. What’s it like?
John Burns:
It’s changed a lot. During the downturn we were able to hire a lot of great people, including yourself. This is a very tight labor market. This is a very tight labor market. This is a very tight labor market where our clients and our competitors are trying to grow, and I think we’ve got a target on our back. So, I know my staff is getting recruited quite a bit. At the same time, so we’re dolling out really good raises to our best people and we’re giving them more responsibilities and all these other good things. But at the same time, we’re not able to raise the cost of what we do for a living. We’re experiencing some of that disruption, if you will, where people always expect more for the same price or even more for less, and so we’ve been pushing the envelope to come up with new tools. We came up with our feasibility services are now diversified all the way from a first look, which is a desktop, and analysis from a smart person, to all these new tools we provide with the demographics and consumer research and demand by life stage that we didn’t offer before, and we’re having to do all of that pretty much for the same price.
Dean Wehrli:
Yeah. The other thing is consumer surveys where that’s becoming hugely important to make that decision on a big project, [crosstalk 00:24:21].
John Burns:
But that’s been an opportunity for us because consumer research in this business has historically been terrible.
Dean Wehrli:
Yeah.
John Burns:
Because it was always very expensive, and now it seems to have gotten far more cost effective, and there’s so much good data out there now. In fact, that’s more the issue. There’s so much data. Can you synthesize it for me? But if we do a good job synthesizing it for us, we can help our clients be far more successful, I hope.
Dean Wehrli:
I think so. I think we all do that, don’t we? That’s great. Okay. Well, that was our inaugural new Home Insights podcast with John Burns. I’m glad we had you as the first one on. Don’t get me wrong, I love Melania Trump, but I’m glad we had you here today.
John Burns:
Yeah. I just realized this is going to be recorded, so in three years you’re going to pull out and see how I did on that forecast piece.
Dean Wehrli:
You know, you’re damn right we are. Let’s recap for that as a matter of fact. We talked about the markets are all over the place, that we can look to the future pretty market by market, and some markets are at the mature state, some markets are still in that early stage, and that the things we’ve got to look out for are, of course, obviously the economy and jobs, and that we expect some pretty solid appreciation though. Six percent for… I mean, that’s higher than the longterm norm, for sure.
John Burns:
Right.
Dean Wehrli:
So, that’s not bad. Obviously the challenges we have are things like deficits and monetary policy and, like you said, the mortgage credit issue with a lot of folks.
John Burns:
Well, we’re keeping a close eye on the mortgage guys, Dean, because the mortgage companies are not wired to be flat or decline and rates are up, and I believe they’re getting far more aggressive right now because they need to.
Dean Wehrli:
And there’s the issue of skin in the game, and in my mind, down payment is one of the biggest hurdles to a lot of young buyers getting into the housing market.
John Burns:
56% of all mortgages today are made with a down payment of 10% or less. That is an all time high, and that is thanks to the government programs in place that allow those sorts of-
Dean Wehrli:
Higher than ’04 or ’05?
John Burns:
Higher than ’04 or ’05, because a lot of people were doing cash out refuys, but not to 90%, only to 80%.
Dean Wehrli:
But we don’t have a stated income and we don’t have-
John Burns:
Documentation is there.
Dean Wehrli:
It’s much stronger than it was. Right? And do you have a pulse? You got a loan. Those days, thankfully-
John Burns:
Those days are gone, but the days of requiring a high down payment are gone too.
Dean Wehrli:
Yeah, that’s true. And we talked about winners and losers. We won’t talk about the losers. In fact, we don’t use that word losers on this podcast. Knock it off, Dean. But we did talk about some of the areas that we might have some opportunities built a rant, the surban concept, which again, we’ll be talking… tune in next time, I think. Then that barbell demography there heading for us. We have these tremendous potential demand at the younger cohort and at the older cohort. So, yeah, you’re right. We’ve been doing a ton of work on H qualified developments all over Northern California and Central California, all over the country as a company. So, that’s something that has some legs still.
John Burns:
Absolutely.
Dean Wehrli:
Okay. Well, thank you. I appreciate it. Again, I Dean Wehrli.
John Burns:
John Burns.
Dean Wehrli:
John Burns, and let’s just real quick, you can find us on our website, realestateconsulting.com. Hopefully we’ll have a little something there, a little button or something like that you can see the podcast, and then we have a Twitter @jbrec. Okay. I should know that. Well, hopefully we’ll start tweeting about the podcast and we’ll see you next time. Thanks.
John Burns:
Thank you.
