Transcript
Dean Wehrli:
Welcome to the latest installment of New Home Insights with John Burns Real Estate Consulting. Today, we have as our guest, John Burns.
John Burns:
Hey, Dean.
Dean Wehrli:
We are going to talk about something very near and dear to John’s heart today, that’s demographics. Specifically, we’re going to talk about demographics and home ownership, or how demographics and demographic cohorts are differentially affected by some four major factors, things like economic trends, governmental policies, and how this changes these demographics and influences whether or not they own a home, whether or not they want to own a home or can own a home. This comes from a book that John wrote with Chris Porter called Big Shifts Ahead. It’s got a ton of other concepts in there. But John, why don’t you give an introduction to the overarching concept of the book before we dig into the specifics?
John Burns:
Yeah, it took me 9,000 hours of research to come down to two simple concepts. So I’ll give you both concepts. One is if we’ll just break down the generations into decade born, it makes our life so much easier because we start comparing 10-year periods to 10-year periods, everybody knows what year they were born, the history becomes much better. So that was number one, instead of just making generalizations about millennials, for example, who were… Mark Zuckerberg and my daughter who just graduated from high school are both millennials and they’re kind of in different stages of their lives.
John Burns:
And the second point is… And the reason we started the book, there was so much noise out here about how things are changing, we were able to come up with something we called a four-five-six rule, which all the noise is in four different buckets. It’s either being… And this goes back to the 1930s. It’s either some shift has been caused by a government policy would be one, a change in the economy, which would be two, some new technology that came along, which would be three, and then some societal shifts like having a child and then getting married instead of the other way around, have all been the big game changers, and I called it four-five-six because those four influencers impact the five different life stages very differently. The exact same thing impacts a child differently than a young adult, different than a family, different than somebody retired. And then the six would be the six key questions executives are trying to answer in their business: who, what, when, where, why, and how is something changing and how should I change my business?
Dean Wehrli:
Okay. Okay, so that’s the overarching, that’s Big Shifts in a nutshell. That’s a good nutshell. It’s a great book. Everybody listening should go buy it right now if they don’t have it already.
John Burns:
9,000 hours of research for 20 bucks. I think it’s a pretty good deal.
Dean Wehrli:
Absolutely fair. So we’re going to drill down into how really the first four factors, am I right? How those governmental policies, economic shifts, new technology, and societal shifts have specifically impacted home ownership and those different 1930s, 1940s, etc. cohorts. Where do you want to start? How do you want to start that?
John Burns:
Well, I’ll give a little bit of history and then I’ll tell you… Maybe I’ll start with today. So government policies, 70% of all the mortgages being made today, the policies are being written by presidential appointees. And this is new since the great recession. So the oversight for Fannie Mae and Freddie Mac is a group called FHFA, who is currently Mel Watt. And he is determining the policies. He was appointed by Obama and president Trump gets to replace him at the end of the year. Then you’ve got 24% of all the mortgages being made by FHA. Prior to the downturn, it was typical that FHA was about 4%. Today it’s 24%, with the policies being set by Ben Carson and the people that work for Ben and HUD. And then you’ve got VA and USDA, which are also governmental appointees. So mortgage policies can change here pretty rapidly, and they have in the past. You go back to those born in the ’30s and ’40s, they got to an 80% home ownership rate, a lot of that helped by the GI bill, which was 100% loan to vets, and every male was a vet, so they got to 80% home ownership. That policy doesn’t really exist today, but we do have a lot of 95% and 97% loans being made by FHA, or are being approved with mortgage insurance by Fannie and Freddie. It’s just not as aggressive as the past.
Dean Wehrli:
Would you say that… Go ahead.
John Burns:
Well, I’m a bear on home ownership. If people are thinking it’s going to be in the upper sixties again, government policy is going to have to get more aggressive for that to happen. And I’m not somebody who’s an expert on what policy should be. I’m just an expert on you set the policy and I’ll tell you what’s going to happen.
Dean Wehrli:
Yeah. So do you think it’s fair to say that the government, at least in a variety of ways, has never been this involved in home ownership? Is that an overstatement given how big an impact the GI bill had post-war?
John Burns:
Yeah. So home ownership from 1900 to 1950 was in the mid-40% range. So the GI bill took it and the growth of Fannie and Freddie actually took it all the way up to the mid sixties, so that was probably more involved. And then they backed off a little bit and we relied on the traditional banks to make the mortgages, and now we’re back to the government setting more policy.
Dean Wehrli:
Yeah. Okay. And so that enabled some of those, for lack of a better term, older generations to become, and of course still are, huge, huge homeowners, as you said, over 80% of those folks own a home. How’s that been changing?
John Burns:
So we’ll stick with the government policy. You used to be able to deduct most of your interest, but now the standard deduction for a married couple is $24,000, so you’re getting $24,000 in deductions and if you have mortgage interest, the first $24,000 in deductions you come up with don’t help you with your taxes. So tax policy is not really super favorable to home ownership either. And we’re seeing, and I know you’re seeing this in your consulting business, more and more homeowners who are older sell their home, tap into their equity and rent, particularly in some of these urban areas. And we’re also seeing a lot of them follow their kids and grandkids to wherever they’ve got a job, and maybe they intend to own a home in that area at some point, but at first they go and rent a while. So we’re seeing falling home ownership. There was a slight exception in the last year, but the trend over the last seven to 10 years has been falling home ownership amongst the older cohort.
Dean Wehrli:
So keeping with the government policy though, do you think in terms of arresting that slightly downward trend over the last several years in home ownership, is government policy likely the only thing that would change that?
John Burns:
Well, there’s a lot of things that come into play here. The economy is very important. I think if we can come up with a solution to build housing more affordably, so new homes can be less expensive, that could change the game here too. There are a lot of things that could change the game.
Dean Wehrli:
Okay. Okay. So how about economics? How’s that acted differently on the various generations over the last few decades?
John Burns:
So again, those born in the ’30s and ’40s, during their working career they had doubled the GDP growth that those born in the ’70s and ’80s have had, double. So when you go your entire career, like those born in the ’70s have, they’re there 20 years in the workforce now, the average GDP growth per person during their working lives is 1.1%. Overall it’s about two because you add population growth in. But when you have that kind of a lousy economy for most of your working life, it’s hard to get ahead. It’s hard to save a down payment. The income growth has been pretty anemic. It’s the economy that’s been causing that. The great recession for example, this is a good example of the four-five-six rule. So great recession, everybody knows what happened. If you were born in the 1990s you were just a kid, but you saw what happened to people that had too much debt. You became very conservative with that. People born in the 1990s now or are more likely to be using debit cards than credit cards, for example. They have a lot in common with those born in the 1930s who were born into the Great Depression who were afraid of too much debt.
John Burns:
And then those born in the 1980s, this great recession, they graduated from college with a lot of student debt right into a five-year horrible economy. They got off to a really slow start. So they had a different experience. Those born in the 1970s, Dean, had the highest home ownership rate ever at their 10-year reunion because that’s when it was the early 2000s, and the lowest home ownership rate in decades at their 20-year reunion because they’re the foreclosure generation.
Dean Wehrli:
So they all shared stories of their REO or their short sale at their 20-year reunion and everybody could cry together.
John Burns:
Right.
Dean Wehrli:
So do you think, though, because the Depression, let’s call it a generalized economic thing, it affected every economic sector I believe, right? This the last one, the one in 2008 recession we’re talking about, that seemed to impact the housing industry even more than other sectors. So do you think this younger generation is particularly snake bit about housing in a way that the 1930s generation maybe it was more general?
John Burns:
I do. And because they equate a recession with foreclosures because that’s the recession then they remember. That was not the case with the recession in 2000 for example. And even the middle little mini recession we had in the mid-1990s. But this generation thinks recession, “Oh that’s housing, it’s a bad time to buy a home,” and we’re starting to see listings tick back up a little bit, not because of anything wrong with housing, but because I think there’s recession on the horizon headlines these days.
Dean Wehrli:
Yeah. And this younger folks have been… We’ve all talked about how they’ve sort of entered these life stages later than their previous cohorts. In fact, you talk about that in the book quite a bit. I wonder how much of that isn’t just sort of there are psychological wanting, when they get married, when they have kids, etc., but it is the fact that they were snake bit so much or at least really scarred by the recession and don’t want to go into those mature things because that means they’re going to have to buy a home and settle down.
John Burns:
Well I think there’s an element of truth to that. I’m actually going to stick my neck out here a little bit. I think people are going to start getting married earlier because it was delayed by the recession and that’s now in the rear view mirror. I think people are going to start getting there a little bit earlier. We kind of spend-
Dean Wehrli:
You mean that the very young people who are in their teens, early twenties are going to start getting married early, is that what you mean?
John Burns:
Well, I think the average age is maybe 26, 27 now maybe it comes back down to 25. But this gets spun too negatively. I think we also need to remember we’ve had nine years of economic growth, so people that are four or five years out of college right now have only known a good economy, although they have the fears of the recession. They’re more likely than any generation before them to have both him and her as a college educated person. And if they’re buying a home at the age of 28, they’re both pretty far along in their careers and making some decent bucks. And the new home industry has really responded to this. The new home guys call it my entry-level home, but it’s typically more expensive than the median resale home price. It’s just a more affordable new home. That’s exactly who they’re selling to. It’s a higher density, small lot, great location, but probably above the median home price in an area, and that’s exactly what these people want.
Dean Wehrli:
Yeah. That’ll be a different podcast that we definitely want to talk about one of these days of how we do get to new homes at a lower cost. Is it manufacturing or modular homes? What’s it going to be? Is it always going to be drive to qualify? Are we going to have different solutions? But let’s do that at another time.
John Burns:
We will. I took a tour of the Clayton plant in Tennessee last week. It was fascinating. They’re putting out 10 homes a day, start to finish, out of this one plant. It’s amazing.
Dean Wehrli:
Yeah. I do think we see a lot more that. We have to. Do you want to switch over to new technologies and how new technology has impacted these cohorts over time?
John Burns:
Yeah. one of the things that surprised me in the book was how birth control technology basically stopped birth for a while and now it actually, until this year ,was bringing it back with IVF. But probably the biggest change in the housing industry has been the smartphone and just the information you can get in seconds on your smartphone now. It’s really disrupting a lot of people. It’s disrupting real estate agents because I don’t need a real estate agent to know what’s for sale. I don’t need a real estate agent to know what schools this house goes to. All of that information is at your fingertips. But I need a real estate agent to walk me through the process. And so the real estate agent, for example, has become more of an expert and less of just a transaction facilitator if you will.
Dean Wehrli:
Yeah. They have to figure out what their value add is, don’t they?
John Burns:
Yeah. And I know some home builders will disagree with me on this, but hear out. The new technologies that have been developed by Realtor and Zillow and Trulia were built by the resale market to sell resale homes. And that’s what people have are using on their phone. And yes, there are new homes in there, but they don’t show necessarily as well as they should. They don’t have a real price. They don’t have a real photo. You’re not certain when you can move in like a resale home, you have some relative certainty. It’s different. And I think the home builders are behind the curve with the smartphone, if you will. But I think they’ll get there at some point.
Dean Wehrli:
No, I think you’re right. It seems like, again, I’m sure many of our home builder friends will disagree, but it seems like the home builders built their websites a while back now, and they were great and they were state the art and they were cutting edge, but not so much anymore. And the real estate agents of resellers, having to value add, have become pretty sophisticated with that.
John Burns:
Yeah. They’re great tools once you’ve got somebody interested in coming to out to visit your community. But I think we’re missing people to get them interested in visiting your community in the first place.
Dean Wehrli:
Yeah. Yeah. And younger folks are definitely… They’re savvy. They’re savvy buyers, they’re all college educated and they have the debt to prove it, and they’re good with numbers. So they have that instant access to information that you talked about, and they know how to use it. So they’re pretty smart when they’re negotiating. I work a lot, of course, in Northern California, in the Bay Area, and those buyers, half of them are engineers, they’re working for tech companies, they know what they’re… They’ve done all their homework and they come in sometimes and they know more than the sales agent.
John Burns:
Did you see the Redfin survey that came out last year? I doubted it at first, but then I got into the methodology and it was solid. They interviewed something like 4,000 people who bought a home last year, and they asked them at any point in your search process, did you make an offer on a home you hadn’t seen in person? 6% of Boomers, 28% of Gen X and 45% of Millennials were making an offer on a home they had not even toured because they’ve kind of toured it on their phone. There’s videos, there’s photos, they know everything about it. I’m sure it’s not a binding contract. It’s a, “Hey, I’d like to bid on this home and here’s my offer.” But that’s a big change.
Dean Wehrli:
And there could be some changes in technology, like VR, virtual reality, has some opportunities there to not build models at all or build fewer models because younger buyers are going to be able to have that same experience with a thing on top of their head. And they’re okay with that.
John Burns:
So can I give you an example from one of our clients who shared this at the design summit we had in March? This is a big home builder. I won’t name their name because I didn’t ask for permission, but they build model homes on a test case and have consumers walk through them and then criticize them. This is one of the largest home builders in the country. And they started doing it with virtual reality, and they got to the point now where consumers walking through the exact homes and consumers walking through them just with virtual reality we’re giving them the exact same feedback. And so they said, “We don’t need to build the physical homes anymore.” The virtual reality is getting to the right answer, and that’s going to be a big change for them.
Dean Wehrli:
For me personally, I get nauseous watching Blair Witch Project, way back when, so I would probably throw up in their office. I may not be the right person for that. But I think it’s a great opportunity to change things up. And I think it’s inevitable you’re going to have that, more manufactured homes, more VR, fewer models. It makes sense. It’ll bring down some costs.
John Burns:
Right, right. My son plays around a lot in the VR and the technology, it gets better and better and better every six months, a lot better.
Dean Wehrli:
As long as it doesn’t make me sick. That’s the key for me, don’t make me sick, that’ll be the benchmark.
John Burns:
I think that’s where we’re headed, Dean, in fact we may already be there.
Dean Wehrli:
The Dean doesn’t get sick test is the key, I think. Any other new technology or any technological shifts that are going to be impactful or have been impactful?
John Burns:
Well that’s the one I’m thinking about the most. Everybody’s talking about driverless cars. I think we’d have to do a whole episode on that one.
Dean Wehrli:
You know, I could see that impacting urban product in particular, because to the degree Uber and Lyft and driverless cars make the urban experience a little more convenient for getting out of there and to and from, it can open up some more folks into that particularly market location than would otherwise be true. It just makes it easier. Or even the reverse could even happen where you live on the outskirts of the true urban core, but you know you’re going to be going there a lot, and having access to driverless cars anytime you want can make that a little more palatable I think.
John Burns:
Well, I’ll just give you one example. One piece of consumer research we were doing is the young buyers on a location, they have a conversation about, “How expensive is it to Uber to my favorite bar?” Because that’s part of the location decision now is that’s what I do.
Dean Wehrli:
I’ve seen sales offices literally on the board or something will say, “Eight minute Uber to downtown,” or something, something like that.
John Burns:
Great example.
Dean Wehrli:
It’s a key thing. It’s a key consideration. Because this was an area where there’s a lot of relatively young, especially couples and kind of early, early young families, and they’re thinking about that. Even with a kid or two, they’re still going to go hang out in downtown on weekends.
John Burns:
Right. These are all shifts. We just need to design our communities differently now for all these things, which is actually really exciting. And what I think about the new home community, the resales were not built with any of this in mind. So this is all an opportunity for home builders. It’s just a different opportunity than existed 10 years ago.
Dean Wehrli:
How about smart homes? Is that something we’re going to see explode? A lot of the big builders are really, really looking hard at that and already acting upon it. You see that becoming the norm?
John Burns:
I do. These smart homes so far really aren’t that smart, Dean. It’s really nothing more-
Dean Wehrli:
It has an Alexa.
John Burns:
You can put an Echo in the home and get the wifi into every corner in most resale homes too. But I do think it is the right thing to do and it’s not very expensive.
Dean Wehrli:
Yeah, I know. You can turn on your air conditioning before you get home. Things like that, little things like that I think will become absolutely the norm, and you’ll do it from your phone from an app. We’ll see though who controls that. Is it going to be Amazon or Google or the home builder is my guess. I wouldn’t bet against Amazon or Google.
John Burns:
I wouldn’t either. And a few months ago, Amazon hired a mortgage exec. So stay tuned what’s going to happen there.
Dean Wehrli:
Okay. Cue ominous music for all of our home builder folks listening right now. Do you want to shift over to our fourth major influencing topic, societal shifts?
John Burns:
You know, the one I think about the most, and I’ve been presenting on this a lot and I just get the most blank stares on, is the whole what Title IX started. So when Title IX was passed in 1972, 58% of all college degrees went to men. Today, 58% of all college degrees go to women. And we devoted an entire chapter to this. But I’m thinking that kind of a dramatic shift has to impact housing. And I really haven’t gotten great answers or great results as to why, other than I do know when you’re talking about young single adults, women are twice as likely to buy a home than men. So I know that some builders have been having great success selling homes to single women much more so than men. But other than that, I really haven’t figured out what that dramatic shift means for housing.
Dean Wehrli:
Say that again. So right now, women are twice as likely…
John Burns:
Yeah, they’re twice as likely to be buying homes unmarried than their high school classmates who are male.
Dean Wehrli:
Well, yeah, they’re experiencing that… As we know from the late life stage decisions at least so far, no one’s getting married and they’re making income, they’re college educated, and they’re making that decision to buy a home.
John Burns:
Right. But that’s not the white picket fence, 30 miles outside the labor force. They’re buying something closer in near things to do with a smaller yard. But other than those types of generalizations, I really haven’t figured out what this has been, particularly for dual-income couples now where she’s the breadwinner. You would think that there would be some differences in the house if he’s staying at home, because the rate of stay-at-home dads is rising much faster than the rate of stay-at-home moms, which is rising too. But I haven’t seen a lot of that merchandised in the homes or homes designed differently for that reason.
Dean Wehrli:
That’s interesting. At the very least is that kind of old school patronizing, you’re speaking to the wife for the emotional connection and the husband for the dollars and cents, those days are thankfully over because of this sea change in women’s income and education. So they’re at least an equal part in that home buying decision. And that’s great I think. Okay. So anything else on societal? Anything in terms of… Maybe sort of wrap up if you want to on how kind of these four major factors have impacted, going back to home ownership, these cohorts and home ownership differently.
John Burns:
Well, I’m more forward looking with this. So we go into our clients and we go into the board meetings and we get questions about what’s this technology going to do, what’s the disruption of retail going to be? What happens if we have a recession? And I think with this framework now, okay, well let’s just not make a general comment that doesn’t do anybody any good. Let’s talk about what this is going to do to your entry level buyers. Let’s talk about what this is going to do to your senior housing business. And it just brings so much more clarity to this. I’m trying to reduce the hours of time wasted on these discussions to make them more productive. And if we’ve done that, then I feel we’ve made a great contribution to the industry.
Dean Wehrli:
I could not agree more, but I’m biased.
John Burns:
Yes, me too.
Dean Wehrli:
Well, this has been good. So we talked about how a four major, major decades-long really kinds of factors, government policy, economic shifts and trends, new technologies, and societal shifts have impacted different demographics. And really more like John, you just said, how looking forward they’re going to continue to impact different demographics, right? Government policies are clearly going to impact home-ownership. Whoever Trump chooses to replace Watts will be critical, and what their policies are, and obviously of course the next economic shift would be an important part of that. Technology, honestly, if I had to pick one, I know economics and government policies are huge macro issues, but on the margins, technology I think is going to be critical because it’s so fast-changing and we’re so quick to adopt new technologies now that I think home builders are going to have to stay on top of that more than ever before.
John Burns:
Yeah. And those are long-term changes. Economy and government policy can be short term, but these new technologies are here to stay.
Dean Wehrli:
Yep. And Alexa, since it’s listening to you right now, Amazon already knows what you want. Oh my God, I think my Alexa just turned on. I’m not kidding. Well, this has been a good… I liked this. I enjoyed this. This has been very thoughtful. Anything else you want to end with John?
John Burns:
No, I think we’re good, Dean. Always fun to go through these things.
Dean Wehrli:
Awesome. I appreciate it. Well, hopefully you enjoyed this latest episode of New Home Insights. Our guest again was John Burns, who coincidentally has a company called John Burns Real Estate Consulting. Please join us next time. See you then.
