In this podcast episode, Craig and Jack review a report from Wolf Research that presents both the bull and bear thesis for the housing market. The bull thesis argues that the housing market is healthy in the long term due to strong demographics and pent-up demand. On the other hand, the bear thesis suggests that housing is not healthy, citing issues with existing home sales, affordability, and potential economic recession.
*The following transcript is auto-generated.
craig fuhr (00:05.354)
Well, hey, it’s Craig Fuhr coming again from Real Investor Radio. Welcome, welcome. This is episode 22. Jack, how are you today?
Jack BeVier (00:13.864)
Doing wonderful, doing wonderful. How are you, sir?
craig fuhr (00:16.11)
doing well as always joined by Jack BeVier from an undisclosed bunker. Where are you Jack? Where are you today?
Jack BeVier (00:23.963)
I’m in Baltimore. I’m in Baltimore today.
craig fuhr (00:26.99)
It’s good to be home. So man, we’ve got a lot to talk about today. Got a whole bunch of articles that I’d like to go through and I know you just had a great meeting of a bunch of top investors from around the country. We’ll touch on that. For those of you who didn’t catch our last couple of episodes, we spoke with an analyst by the name of Melody Wright. Melody was fantastic. She’s been in the industry for quite a while.
in the mortgage industry, mortgage tech, and had some really cool takes on where she thought the market was going in terms of housing, demand. We had a really lively discussion with her, some of which I think we agreed with Jack and some of which we did not. I just wonder if you might want to touch on that for a little bit.
guide folks back to those two episodes, which I think were really fantastic if people hadn’t had a chance to listen to them.
Jack BeVier (01:27.536)
Yeah, Melody is super smart, very well read on housing economics. And she’s got some, she’s got some really contrarian views that are based off of her firsthand knowledge and research of having physically visited, um, a lot of job sites, home building job sites specifically across the country. Um, and her view that, that there’s a dirty secret basically in home building and that
The home building industry has really overbuilt the wrong kind of housing for the country. It’s not affordable and it’s sitting there. And she likens it to the kind of overbuilding that happened that led up to the Great Recession. And it’s her view that we are going to enter a housing crisis that is on the same scale, if not worse, in her words, than what we experienced 15 years ago.
craig fuhr (02:26.167)
Jack BeVier (02:27.688)
She gave me a ton to think about and frankly, we were pressing her a little bit on different aspects of her thesis there. But frankly, she’s very well thought out on it. And it gave me a lot to think about. I’d spent a bunch of time in the past couple of weeks since then really trying to vet that thesis, vet her thesis and wonder maybe she sees something that none of us see.
and we’d be wise to take heed. I can’t quite get there. I’m still not nearly as pessimistic as she is about, I do agree with some of her fundamental ideas that we’ve overbuilt a lot of the wrong inventory and it’s not affordable and certain projects are going to languish for a number of years because they’re just not with the market once right now. I just don’t think it’s, but frankly I just don’t think it’s on the same scale.
as what she does. And I don’t see it as a harbinger of doom in the housing economy the same way that she does.
craig fuhr (03:30.73)
You know, it’s funny, I don’t want people to, when they listen to the show to think that, you know, we have this sort of dour look about everything in terms of the market. In fact, I really think there’s tremendous opportunity that’s coming, but it feels like, you know, on any given episode, no matter who we have on, they’re going to have an opinion. It’s generally based in fact, but it’s amazing to me, Jack, how varied the opinion is amongst analysts.
You know, I can’t say that I’m surprised. I think that’s always been the case. If you get two analysts or two to two economists in a room, you’re always going to get two different opinions. But you know, I wanted to go through today in some depth on this episode, this really great report that you had sent me from Wolf Research. Wolf Research is a is a company of analysts. Essentially, they have over 25 analysts and they cover.
600 plus companies in the home building space and in different industries, in fact, 81 different industries across the spectrum. And so I had this very extensive report that you sent me, Jack, and I thought we would just go sort of bullet point by bullet point where they basically sat down and they had a bull thesis of the market and a bunch of bullet points supporting that. And then as you know,
and then a contrarian bear thesis. And I thought it would be interesting to go through that for the listeners. So we can jump into that if you’d like.
Jack BeVier (05:08.316)
Yeah, absolutely. I think it’s an excellent compilation. It was Wolf Research is not something I was previously aware of. One of my best friends who actually got married this past weekend. Shout out to Jason Minzer of Timberlake Homes forwarded me some Jason forwarded me A wolf research piece that he thought I would find interesting and I went to their website. They’ve got a ton of free content that is really high quality and this particular piece.
Um, I, you know, for me it was the best compilation of both fit of frankly, the talking points for the optimists as well as the talking points for the pessimists. And if you read and really like in this one article, I found pretty much most of the talking points that I had, that I’ve seen in, in the media that’s published on the housing research side of things. Um, so yeah, let’s, uh, let’s, let’s dig into some of the, the nitty gritty here. Cause I think it’s super high quality content.
craig fuhr (06:08.058)
Yeah, I would direct folks to Real Investor Radio forward slash notes. I believe that’s correct. Rachel will put the put that link somewhere in the description, I’m sure. But let’s just jump in here. So the article is entitled Home Builder Bull versus Bear Debate Talking Points. And the bull thesis here is essentially that the long term underpinnings of the housing of housing are healthy.
And somewhat surprising, they say, that year to date, 23 demand will rebound and pricing improvement will support this thesis. So bullet point number one, Jack, the new residential has already gone through its recession, they say. Over the past two years, new home sales have declined by 22% to 640K.
in both 22 and the trailing 12 months ending May of 23. By the way, this report was, it’s a little dated. It was done in July of 23. But it also says that shelter companies are down 40%. I’m sorry, shelter companies, I’m sorry. Let me stop there. Shelter Jack comprises 40% of core CPI given.
the rent home price moderation in the second half of 22, which leads core CPI. The odds of a soft landing or light recession have increased and indicate housing has already bottomed out.
Uh, they’re, you know, affordability is obviously stretched right now. Builders have met the market with price cuts, including mortgage buy downs, which has been a tactic of theirs to keep demand high. And they’re saying, assuming a portion of incentives are used to buy down mortgage rates by a hundred Bips, builders have already reduced a monthly payment by 10% versus. The peak of.
craig fuhr (08:15.93)
second quarter of 22 which helps alleviate the affordability crunch. Their ability to buy down rates is a meaningful competitive advantage versus resale and new residential offers a better value proposition than resale in a historical context. So what are your thoughts there?
Jack BeVier (08:38.832)
Yeah, like, bear in mind that this there’s I think there’s a perspective. Peter Lineman, who’s a housing professor at the University of Pennsylvania, reminds us I follow his work and he reminds us on a regular basis that this is all COVID hangover that we freaked out because we didn’t know what COVID was going to do. And we freaked out. And we printed a ton of money.
because we didn’t want people to get hurt economically in the midst of a health crisis. And we printed, and in retrospect, we printed too much, but at the time we didn’t know. You know, we didn’t know how long this health crisis was gonna last. So we overshot it and now we’re correcting back and that’s caused some distortions in the financial markets. But this is all just COVID hangover. And in 2019, we had a healthy housing market.
And then things became, we printed too much money. If you happen to engage in the market in 2020 and 2021, you got the best of that trade because you borrowed a bunch of really cheap money. And now we’re swinging back the other direction and the price of money has gone too high. But like a pendulum, it’s going to swing too high and then it’s gonna come balance back into the middle and we’re gonna then get on with our lives.
and go back to a productive economy. And there’s no real, there was no reason. This is just, this is just the swings back and forth as a result of, you know, the financial engineering that we tried to do to help make things less painful during that period of time. But everything’s fine. And, you know, and once we, if everyone would just, you know, get back to work and, and let a little bit of time pass, this will just work itself through the system and we’ll go right back into a very healthy economy and a strong housing market.
And I get that. That makes a ton of sense to me.
craig fuhr (10:35.01)
There is a sense that there’s a sort of that shock that happens when interest rates, you know, essentially double, yet the American consumer is amazingly resilient, kind of has a short memory. And we kind of reach an equilibrium point where the consumer ultimately says, oh, yeah, these rates are here to stay. I’ve got to get on with my life. You know, I’m going to bite the bullet and go buy a home at.
you know, whatever the prevailing rate is. One of the next bullet point, which I thought was interesting, Jack, is that the demographics remain supportive. This is part of their bull thesis again. As millennials, which are the largest generation in history, continue to enter their prime home buying years, it’s clashing with the current inventory shortage and significant underbuilding that has occurred since the Great Recession.
stronger demographics with a structural shortage of homes is a healthy setup. And over the next five years, there will be 1.1 more millennials entering their prime home buying years than the prior five years. Now I think there’s probably some changing consumer sentiment there as well, Jack. Not all of these millennials are, you know, big on home buying. Many of them, there’s a sentiment amongst them. If you take a, you know, I saw a recent survey of
college students. I don’t think those are necessarily millennials in all cases. However, 40% of them said, you know, I think I’m I think I’d rather rent than buy a home. So there is that sort of changing consumer sentiment. But what do you think of that in terms I had no idea, by the way, that the millennials are the largest, you know, demographic in history, I actually thought that would be the baby boomers. But evidently, there’s more.
Jack BeVier (12:34.372)
Yeah, yeah. All their kids, I guess the, um,
craig fuhr (12:36.872)
Jack BeVier (12:40.552)
Melody writes as the bear and I’ll bring up the distinction here. So she would argue the demographics are working. She would argue the opposite of this, I think she would. And she would point out that we’ve got all these older folks, all the baby boomers moving to Florida, for example, right? Like to paint with a very broad brush, like moving to the South from the Northeast. But those people aren’t going to live forever and they’re not going to be able to live by themselves forever.
craig fuhr (12:44.842)
Jack BeVier (13:07.628)
And what are we going to do with all these million dollar houses? You know, 4,000 square foot million dollar houses in Florida. When these folks pass away, no one’s going to want them. And she, she points to that as a, a problem from a demographic point of view. So I think this bull thesis points out the, the broader market, um, you know, and I think that if, when we’re talking about the median house in the country, this bull thesis speaks more to that piece.
which isn’t to say that there aren’t pockets where the demographics aren’t, are going to factor in negatively for the housing market. Um, so, you know, I, I feel, you know, lies, damn lies and statistics. You can, you can twist the twist, the math any way you want to, you want to in order to make the point that you’re trying to make. And in this case, I feel, um, you can either zoom in or zoom out to make your, to, you know, to make the argument that you want to make as well.
And so, uh, when, you know, we’re talking about bulls versus bears, it’s difficult because you have to start with, are we talking about a particular market or the overall market? Are we, you know, are we zoom, you know, where are we zooming? What level of zoom are we using to start the conversation? Otherwise you people just talk past each other and one person’s a bear and the other one thinks the other one’s an idiot. Not neither of them idiots, right? They’re just using two different levels of zoom when they’re, when they’re starting their conversation.
craig fuhr (14:26.156)
craig fuhr (14:35.924)
I love the
Jack BeVier (14:36.104)
The demographics one’s an interesting illustration of that.
craig fuhr (14:40.27)
It definitely speaks to a macro point, the shifting demographics of the country and the point that you’ve made before in consumption. We’ve all grown very accustomed to our much larger houses that have been built over the last 20 years.
craig fuhr (15:07.818)
generation is that many of them don’t necessarily look at that, you know, 3500 square foot house and say, Oh, that’s something that I aspire to. You know, in fact, you know, a lot of them have said a lot of them are renting much smaller spaces. And so, you know, I think I think to keep an eye on that moving forward, especially in terms of what builders are building.
would be a really interesting thing to sort of put a pin in and watch over the next few years.
Jack BeVier (15:41.832)
I was on, I mentioned this in the last episode with, um, with Melody, I was on the Zelman, Ivy Zelman, their research is excellent. And I was, they did a, an online conference, you know, set of panels over the course of three days for home builders, um, or primarily home builders. And they were very, everyone was very overt. Ivy was very overt. The home builders are very overt that the new starts, the size of the new starts is coming down.
because as Melody points out these 4,000 square foot, $800,000 million dollar houses don’t have demand right now. But if you put a new construction on the market at $399,000, it flies off the shelf. And so the home builders are pivoting towards that. It’s the reason that build to rent is still a thing. And so yeah, I think that that’s already started. And I think that that’s going to continue because of…
uh yeah the affordability issues.
craig fuhr (16:44.614)
All right, next bullet point supply and demand issue here. So the housing shortage, the US is structurally undersupplied by 1.5 to 2 million units per Wolf’s proprietary calculation. Existing inventory is further constrained by rate lock as existing homeowners are not compelled to surrender their 3.5% mortgages to move to a 6.5 plus percent mortgage. And this continues.
pushing consumers to new residential as home builders have available inventory and a relief valve for the shortage. With the US adding 1.7 million jobs in the first half of 23, wage inflation is healthy, and there has been little turmoil on Main Street that will lead to distress miss monthly payments.
as an example, for existing homeowners in an interrelated uptick.
in existing for sale inventory. Let me read that one more time. There has been less turmoil on Main Street that will lead to distressed or miss monthly payments for existing homeowners and an interrelated uptick in existing for sale inventory until something changes. Tight existing for sale inventory and job growth are supportive of the new residential market gains. So.
Essentially what they’re saying is, you know, blue skies for builders.
Jack BeVier (18:23.632)
Yeah, I think that to take the to I’m sure I’m jumping ahead and the bears are going to bring up this point, but it’s until something changes, I think is like the operative issue there. And again, now we’ve zoomed now we’ve zoomed into like everything’s fine right now the consumers really still very strong, like, this is just a you know, the interest rates will set steady out. And as long as no one loses their jobs. That being like the big missing piece there like if
You know, the X factor in this conversation being, are we going into a recession or not? How severe is that recession going to be? And that your view on that, I think is, you know, fundamentally connected to your pessimism or optimism for, for the, you know, for what to do in the housing market.
craig fuhr (19:09.226)
Yeah, what are your feelings there? I mean, in terms of a pending recession in 24.
Jack BeVier (19:15.304)
So I think, I think I made this art comment on a previous episode. Otherwise it was at the, um, the mastermind this past weekend. Uh, Fred and I, uh, my partner, Fred went down to, uh, Miami to the ABS East conference, it’s asset back securities. It’s basically 1500 white dudes in blue suits. It’s a super interesting. It’s wall street conference and they’re all, it’s all about securitization bond buying. Um, and.
They had a couple economists in the keynote panel and what surprised me was that these economists had the same view of what was going to happen. Like I’m used to, like you said, you put two economists up on a stage and you’re going to have polar opposite views potentially. But their view was that, their view of the next 18 months was that we saw price increases, sorry.
businesses saw cost increases in the wake of COVID or in COVID and in the wake of COVID because of the distortion distortions of printing too much money and people not wanting to come back to work. And so businesses experienced cost increases, but then they were able to pass those cost increases through to consumers and consumers paid. So we’ve all paid higher prices. That’s called inflation. This time, though,
Fast forward a year, the consumer is much weaker. We’re still experiencing cost increases. Some of the supply chain disruptions have worked out, but labor is still strong from a relative point of view, from a relative leverage point of view. And so businesses, and not everyone’s dying to go back, dying being back to work and back to work. So we’re still experiencing cost increases, but this time over the course of the next six to 12 months.
The consumer is not going to pay it. Businesses are going to try to pass through those continued cost increases. The consumer is not going to be able to pay it this time because they’re savings accounts are empty and their credit cards are getting to their maxes. And that’s going to result in just lower revenues, those lower revenues and therefore lower profits. So this next phase is that profit margins get squeezed at businesses.
Jack BeVier (21:40.176)
And once profit margins start to become squeezed at businesses, they start looking with a little bit more of a raised eyebrow at all of their inputs, you know, like cost of labor, and they start laying people off on a more regular basis. And that is going to be the, the trend on mass over the course of the next 12 months is that businesses will just be slowly shedding more labor and weakening and weakening and weakening the labor market, which will then
craig fuhr (21:40.27)
Jack BeVier (22:10.22)
also result in less consumer spending, which further weakens businesses and causes it to happen even more. And we’ll just slowly cycled down into a shallow recession. In the third quarter of next year was, you know, if you tried to pin them down, that’s roughly where they were thinking about this entering a recession. And then we’ll be in a shallow recession for a protracted period of time, not a 90 day COVID recession, a year.
of, of shallow recession. And then we’ll slowly climb back out of it as everyone gets their ass back to work and starts, you know, starts working again and, um, is more productive. And, um, that was kind of a, that was kind of a consensus view on the stage. And I thought it was a very interesting. Take, uh, I’m having a hard time poking holes in it. Frankly, I think it’s a very plausible path forward. Uh, so.
I don’t think it’s going to be a super hard. There’s no crisis. Their point was like, and another point they made was there’s no crisis. Like we’re not going to have a deep recession because nothing horrible, well, save for war, right? Like war being another X factor.
craig fuhr (23:22.378)
I was going to say there had to be one X factor that they threw in there and I would think that would be a big one.
Jack BeVier (23:28.036)
Yeah. So war notwithstanding, we’ll have a soft recession because, you know, and just a shallow, long, you know, kind of depressing, you know, next 12 to 18 months. So that kind of view is like, Hey, get used to interest rates for, for high being higher for a little while. But then as the, as the, as recession happens, the fed decreases, you know, may, you know, will decrease rates some, but
it won’t make a difference because you don’t have a job to pay for the stuff. So yeah, mortgage rates came down, but you lost your jobs. You’re not buying houses anyway, or you’re like, Hey, it’s the middle of a recession. It’s a crappy time to buy, to buy a house right now. So once you can afford it from an interest rate point of view, you won’t have a job to qualify for the mortgage. And so that will keep us in a kind of depressed, um, you know, a shallow depressed, uh, invite, you know, economy.
craig fuhr (24:25.182)
like to get into shallow anecdotal evidence, but I speak to a lot of people and friends of mine who are in sales, they’re keeping their jobs right now, but their commissions are getting jacked with. They’re essentially being decreased significantly. And I think that’s a way for a lot of companies to decrease labor costs without actually doing the round of layoffs that I feel like they’re trying to avoid.
Jack BeVier (24:25.32)
Jack BeVier (24:46.44)
craig fuhr (24:55.19)
especially if they’ve spent so much money invested in these better employees. But yeah, I’ve spoken to three people over the last three weeks, my wife being one of them, whose commission got significantly tweaked. And so I think and we’ve heard of, you know, layoffs in certain sectors already. So I think, you know, we could see some layoffs coming.
Jack BeVier (25:26.32)
Yeah. I mean, housing and housing and mortgages, you know, definitely one of those where there’s a lot fewer loan officers today than there were, but still, when you look at origination volumes versus the body count of, of who’s still in the business, we’re there’s a ton of extra, um, loan officers still in the market. And if things don’t turn around in a year, um, you know, that, that’s got to continue to shake out real estate agents. I mean,
Transaction volumes are still even lower, which is just crazy that we’ve been saying that for like three years in a row now. Um, but real estate agents are really feeling the pressure right now. And, you know, eventually, you know, eventually they’ve got to capitulate and get a day job. So.
craig fuhr (26:08.922)
PNC just went through a pretty massive round of layoffs. They didn’t disclose exactly how many, but analysts have said it was sizable. There’s been layoffs already in tech, with only about seven companies really guiding the explosion in tech. So yeah, I think there could be more of that coming.
Jack BeVier (26:30.3)
Anyway, back to the bull. Back. I thought we were talking about the bull side of things.
craig fuhr (26:33.434)
We are we are so easy to talk about the negative Jack. Where do we need to take a pause here Rachel for Jack’s camera? There it is. All right. We’re back in. All right. So next bullet point and this again, we’re speaking really, from a home builder standpoint in terms of the overall market. The current mortgage rate today, again, back, this is written in July.
of six point eight percent. I think we’re around I took a look today. We’re around seven point seven FHA Jack right now. So the current mortgage rate sits around three to four hundred basis points above rates that legacy homeowners are currently holding which I mentioned previously. This is the highest spread since the 1980s. And so during the 80s new home.
the new home market share increased from 14 to 17% over that two year period. And what we’ve seen over the last year or so, Jack, is that market share for new home builders is still rising above historic levels. They’re saying that trend is set to continue based on the, you know, sort of the spread between mortgage rates right now for legacy homeowners and new home buyers. So,
they’re saying again, you know, throw in that potential right there. And that really speaks to us a softer landing, you know, in the market. So I think we’ve spoken to that. But let’s move on to the next bullet point here, Jack. So again, speaking of mortgages, the spread between the 30 year mortgage rates and the 10 year treasury rates is now around 300 bips.
And historically that spread is about 170 bips, which suggests that mortgage rates should compress over the next 12 months once the mortgage market becomes comfortable with the Fed’s QT. And assuming that the 30-year mortgage rate versus the 10-year Treasury spread normalizes, they’re saying that an incremental five and a half million households.
craig fuhr (28:50.998)
would be able to then afford the median price house. Affordability is obviously the big factor here, Jack, with many markets in the country, you know, being the least affordable in history. You know, I read it the other day that Americans are generally spending somewhere between 36 and 40% of their income on housing right now. So speak to that.
Jack BeVier (29:18.608)
I struggle a little bit with this one. Sorry, not to be the perennial bear here, but again, it’s based off of the thesis that like, hey, this is going to work itself out and that the natural credit spread for mortgages is 120 basis points lower than where it’s currently priced, 120 basis points lower than where it’s currently priced. The difference is that those numbers, that baseline, quote unquote baseline was…
The past 15 years when the Fed was an active buyer of mortgage-backed securities, the government was subsidizing our purchasing of houses. The Fed has now reversed course and is letting those mortgage-backed securities trail off their balance sheet. They’re not buying mortgage-backed securities like they were before. It’s left to just the private market.
to set what the appropriate credit spread is. And the private market has said, well, we need an extra 100, 120 basis points. Otherwise we’re not interested. Combine that with you have less foreign money purchasing American securities for a lot of geopolitical reasons. And I’m not sure that I like truly understand the thesis that this spread is going to come back down. Yes, it is elevated, but maybe it’s appropriate.
Like maybe it’s appropriately elevated and maybe it’s going to just stay there. And this is just the new credit spread. And, um, I’m not, you know, I’m not convinced that there’s this natural level that’s a hundred basis points lower.
craig fuhr (30:50.413)
craig fuhr (30:56.65)
Yeah, you know, the funny thing that Wolf states here is, you know, in their research, they say that clearly higher mortgage rates negatively affect demand. We’ve seen that rate started spiking in January of 21. Historically, rates are disrupt disruptive for roughly a year. And after that home buyers adapt to the prevailing rate environment and move forward with their lives set another way one year following one year following rate spikes. Housing goes the way of the economy good or bad.
and coupling this with a shortage of homes, demographics, and a strong year to date employment growth, this dynamic will keep the market relatively high through 2023 plus, as housing appears less cyclical than past cycles.
Jack BeVier (31:45.288)
I think that’s the bull thesis. Yeah, that’s the bull thesis.
craig fuhr (31:45.47)
I don’t know. That is definitely full. Next point is given consumers strong balance sheets. It’s talking about the health of the consumer and the unhealthy and healthy employment picture. The Fed will be able to engineer the soft landing, which will allow housing demand to stabilize. Now, speaking of the strength of the consumer at this point, read a couple of days ago that.
credit card debt has surpassed $1 trillion. It’s much higher than it was during COVID when people were saving more. There’s no shortage of people taking out HELOCs and we’re seeing some defaults. So are the consumers nearly as strong as Wolf might suggest here, Jack?
Jack BeVier (32:35.556)
they used to be. Right? They used to be but today you know, this was written back in July. I think back in July, people were saying the consumer could just continues to you know, continues to exceed expectations and you know, and everything’s going to be fine. But I think that we’ve for the past four months started to see more and more cracks in the consumer. And
So I’m not a full bull on this for that reason.
craig fuhr (33:06.338)
All right, so let’s get into the bare thesis. And I think we’ve already hit on some of these points. First point is that housing overall is not healthy. Existing home sales are roughly, usually historically 85 to 90% of all home transactions. That is down 25% year over year at 4.3 million houses. This is in line with levels during the
Jack BeVier (33:11.388)
Yeah, skip ahead.
craig fuhr (33:36.078)
08 to 11 housing bust, the worst housing recession since the Great Depression and combining this with stretched affordability and a potential economic recession, the housing market is still quite fragile. And although new home sales have stabilized, the industry is benefiting from an unsustainable pent up second half of 22 demand. So they’re essentially saying that all of that
was brought forward and now we’re seeing the subs the you know it’s subsided and that will not continue.
craig fuhr (34:16.266)
The bulls argument that the US is structurally short housing inventory conveniently ignores two key items, the affordability issue in the United States and household formation that was pulled forward during code.
craig fuhr (34:32.766)
Yeah, jump in here anywhere.
Jack BeVier (34:36.052)
craig fuhr (34:39.591)
All right, so the second bullet point here, which I put an asterisk next is that the under supplied argument entirely overlooks the affordability side of the equation, which is stretched following a 2.5 year period between 2020 and 2022, where we saw 40 to 45% home price appreciation. If you couple this with the 300.
3 to 400 bit rise in mortgage rates since 21. The US has just experienced the largest affordability shock in history as the median monthly mortgage payment has increased 100% since the beginning of 2020. This affordability issue will cap home pricing in the next couple of years and continue squeezing home buyers out of the market, particularly if paired with a recession.
Jack BeVier (35:33.872)
Yep. I think that, um, that piece and the prior comments ignore that they assume the consumption stays the same. And I just don’t think that’s the way that people act. I think that when affordability is stretched, you delay and you have roommates for longer so that, uh, so that, you know, you, you consume less housing per capita in order to make up for that. And so.
Again, I think it’s like, you know, what, what timeframe are we zooming in on here? You know, are we talking about, you know, the bull versus bear thesis is that are you talking, you know, some of those are 10 year comments. Some of those are three year comments. Some of those are 12 month comments. And I think a lot of the bear thesis comments are zoomed in on that disruptions that are happening in the COVID, you know, the delay in the COVID pull forward.
of demand and so this is we’re in the wake of that right now and so things are weak right now. Yes, absolutely. And in an over the course of a 12 month period, if you’re if that’s what you’re really focused on, and making a decision as to like what our housing price is going to do over a 12 month period, I think that those are absolutely salient and like the right the right factors to be taking into consideration. If you’re buying housing for the long term though.
they’re pointing out 12 month distortions, but those are only 12 month distortions. The other, I think the bull thesis is more convincing if you zoom out to a 10 year investment horizon. I think the bears are a little bit more convincing if you’re zoomed in on a 12 month investment horizon. So, kind of…
Jack BeVier (37:26.728)
So I think that, yes, we’re absolutely gonna see some distortions in behavior, and we have seen those distortions in behavior, and as a result, we’ve seen really low transaction volumes.
Another thing to consider, I guess, is that when you’re talking about a bear, are you talking about, do you care about the nomi- what do we call bear? That the market is slower, the transaction volumes are lower. If you’re a real estate agent, that’s what they care about. If you’re a mortgage broker, that’s what they care about is volumes. They don’t really care about the absolute level of prices, just that people are transacting. So a bear market to a real estate agent is a slow, is a low transaction volume market.
A bear market to a realist to a flipper is a short-term pricing drop, right? A tw- within a 12 month period prices drop 10, 15%. The flipper cares about that. If you’re talking to a, you know, and so that’s a bear market. If you’re talking to a landlord, a bear market is one where there’s, where interest rates are too high or rents go down a little bit and they’re not able to make their, they’re not able to make any, make as much money or any money off of their rental property.
or they’ve got high levels of vacancy because we’re in a recession and people aren’t making their rent payments. So you’re having to go through an eviction. That’s a bear market to a landlord. Um, so I think you have to kind of, you know, pick your perspective when we are choosing to talk about a bull or a bear market, uh, thesis. So all of these points are, all of these points are valid. It’s just from different perspectives and from different timeframes and, and with different timeframes in mind. Um,
craig fuhr (39:07.402)
Yeah, I agree. And I think you’ve always had a very healthy long-term outlook on the market and American real estate in general. That’s always been the Jack Bevere outlook.
Jack BeVier (39:21.764)
Yeah. The, the, we have, you know, we do a lot of investing on those shorter timeframes as well. Um, something that was really interesting from, um, from real investor round table. This, uh, we run this nonprofit mastermind three times a year. We get together. We’ve been getting in together in Baltimore, sometimes Dallas as well, but there’s a lot of really high level. We run it as a nonprofit. Um, it’s meant to just share ideas. There’s lots of great masterminds out there that are run on
both nonprofit and for-profit basis. We just happen to run ours as a nonprofit. It’s really meant to be ideas sharing. And so we try to get very high level operators in the room. And we’ve, over the past five or six years, done a good job of that. And yeah, folks from all over the country, generally everyone in the room’s doing at least 50 transactions a year. And there’s some killers in the room as well, who are doing like,
craig fuhr (40:05.366)
Folks from all over the country, right, Chuck?
Jack BeVier (40:19.344)
you know, several hundred, like, you know, three, four hundred, um, real estate deals themselves, like not buying a multifamily, not buying, you know, 300 unit buildings, like now doing like 300 flips. Um, and a really interesting, and so they’ve, you know, they’re, they’re running bigger shops, they’ve got to decide how they’re going to pivot over time. Because if you become one thing, and you do one thing, we’ve talked about this before, then you ride the cycle.
You ride the wave of that business model going through, you know, going through the economy. So a better thing to do is be able to do multiple things. And when rentals get tough, flip more houses. When flipping gets tight, wholesale a bunch more. Um, when you’re not seeing interesting cap rates and you’ve got some capital to deploy, start lending instead of, you know, pivot between the equity and debt. And, uh, so there’s a lot of folks with those kinds of balance sheets.
Uh, in the room who are, that’s what they’re interested in, you know, like what is the business model, what geography do I want to be in? What business model do I want to be in and what part of the capital stack do I want to play in? And if you can pivot, if you were, you know, if you can create a platform that is, um, not, no one’s purely agnostic, but, but that has the ability to pivot between, uh, each of those three things. Then I think that you can set yourself up a real estate platform that endures and is
and excels through cycles. Um, so for example, for, for us in Baltimore, two years ago, we were, we were, we were still buying about a hundred houses a year. We’re still buying about a hundred houses a year, but two years ago, I was adding 75 of those as rentals, flipping five and wholesaling the rest. Fast forward to today. I’m hardly adding a rental right now because the cost of capital is eight plus percent.
And that’s just not a creative, you know, I’m not buying 10 caps. Prices have not come down to the point where we’re buying 10 caps and borrowing money at an eight makes sense. So we’ve really pivoted every pivoted a lot of our pipeline over to over to flipping. At the, this, this past weekend, there are a number of, uh, build to rent operators in the room who are doing, who are building several hundred houses a year. Um,
Jack BeVier (42:45.232)
some of those folks, they were selling turnkey rentals when interest rates were lower because that was an attractive proposition for a passive real estate investor to be able to borrow money at 4%, invest in turnkey rental real estate. Other folks were doing build to rent and selling to the large funds in packages of 30, 50, 100.
And a lot of both of those categories have now shifted towards retail sale. Uh, because V value has not come down very much. Um, and the prospect of refinancing, um, whether for a turnkey rental investor, either a single person or an institution, their cost of capital is much higher. So that bid has gotten weaker.
The investor bid for turnkey real estate either as an individual property or a package has gotten weaker. And so they’ve shifted and now they’re selling, now they’re doing 250 retail sales a year for $350,000 new construction houses in the Carolinas. And so we’ve seen those folks pivot to accommodate what we were just talking about, that in the short term, interest rates are high.
A refinance exit is not a profitable exit right now. Um, it’s hard to get all your cash out and keep moving things forward. And then the money that you have stuck into that refi is not going to have a very interesting return on equity, but you can, but there’s still an exit to the homeowner, especially in the Fort in the affordable segments. Um, and so we’ve seen a lot of pivoting in the, over the course of the past two or three meetings, uh, big pivots, you know, big, big pivots over the course, the past eight months to accommodate this kind of new operating environment.
and get through that short term.
craig fuhr (44:35.538)
Yeah. Yeah, you know, we’ve spoken to that, Jack. And I think that, you know, it takes a, a really strong operator to make that pivot. You know, I think I think the average, you know, guy gal who’s out there investing and is doing multiple deals per year, but certainly not that 50 to 100 plus.
They see, they feel that they know that they have to make a shift in their business strategy because of rates in the environment, but they don’t quite know how to do it. And one of the things I think that is cool about what you guys do with the real estate investor roundtable is that you speak to guys who are making those shifts, those massive shifts, and who are figuring it out.
One of the things that I think you’ve spoken to on the past episodes was this, this is a time to really tighten your operations and to maybe get schooled up on some different strategies. Right?
Jack BeVier (45:44.54)
craig fuhr (45:46.718)
So a couple of final points here on this really great report. Again, we’re on this Wolf Research Report. I believe that’s wolfresearch.com. The report was entitled Home Builder Bull versus Bear Debate and the Talking Points. Just a couple final points here, that the 30-year mortgage rate versus the 10-year spread is very elevated. We spoke about that.
Last point that I thought was interesting, Jack, is the supply of multifamily units currently under construction, which is the highest in the past 50 years. And it really dwarfs the past three peak levels of 78, 86, and 2008. It says these multifamily units, generally rentals, will need to be leased up and rented upon completion. There is a concern, however, that the multifamily sector is becoming oversupplied and that potential rent concessions will pressure.
the for sale market as consumers elect to stay in rental units. So certainly is there there’s a potential that this will occur and they believe the decision to purchase is principally driven by lifestyle choices. So speak to that Jack. We see a lot of multifamily construction around the United States here in Maryland. A lot of luxury being built that appears to be sort of empty right now. So what are you seeing there?
Jack BeVier (47:12.9)
Yeah, I think that the concern about multifamily is driven by mostly the fact that it’s that luxury, higher rent per square foot product. It encourages, it’s targeted at the millennials, right? We were under supplied in this 10 years ago. People, you know, we do what we do, right? We, you know, there’s an opportunity to make money building luxury. We build a ton of it and we probably overshoot it because momentum in real estate markets acts that way.
craig fuhr (47:22.578)
Jack BeVier (47:40.532)
And so that’s a criticism and I think a valid criticism as to because it’s competing, right? Shelter is shelter is shelter, you know, you know, and when we’re talking about affordability, the, you know, the, it is very fungible, a multifamily building unit versus an entry level home from a pricing point of view. They’re direct competitors with each other. And so depending on millennials,
desires to start families, if they delay that, then they’re going to stay renters for longer. And so they are direct and they’re building a ton of multi nice, you know, they have continued to build a ton of nice multifamily. I think multifamily starts are really trending down significantly right now. And so that is, but that’s because there’s a concern that there’s going to be that there’s so much in the pipeline that there’s going to be an overhang. And if there’s an overhang
then it’s a threat to rents. And it’s not only a threat to multifamily rents, it’s a threat to single family rents as well, because those are direct competitors and very fungible with each other. And so yeah, I think that’s a valid concern. And I think it’s a valid concern on a micro market basis. People are freaked out about that in Austin and in other markets where there’s just a tremendous amount of luxury multifamily building still in the pipeline.
craig fuhr (49:06.124)
Jack BeVier (49:07.508)
And it’ll absolutely be a factor. And it’s a factor that is going to play itself out over the course of the next 18 months. And so people, it’s, you know, it’s tough to wait how much of a factor that’s going to be. And depending on the preferences of that millennial potential home buyer, um, if they can get a great deal in a luxury building, maybe that does tamp down demand for.
new household formation in single family, in single family detached. So yeah, it’s a threat. I think it’s a valid concern.
craig fuhr (49:41.782)
Yeah, me too. You know, if the price of renting becomes more affordable than owning, which it is in many markets right now, and rents, you know, there’s definite downward pressure, I had another report here somewhere on my stack of the downward pressure on rents right now. I think you could see people opting for rent, much more than then than home buying. Especially if you can go into you know, brand new building, lovely, you know, it’s affordable.
more affordable. So yeah, I would love to get some thoughts from folks if you want to comment on this particular report. I just thought it was fascinating. Thanks for sharing it, Jack. It’s great report. I can’t wait to see more of their stuff from Wolf Research, maybe have some of these guys on the show, talk about their thoughts. But yeah, I would love to hear folks comments on sort of what we talked about in terms of supply and demand affordability.
where the market’s heading. We’d love to get your thoughts on it. So go ahead and comment. We’d love to love to hear you. We’ll wrap it up there. Jack. Start up another one in a few minutes here. Guys, thanks for tuning in to Episode 22 of Real Investor Radio. And we’ll talk to you soon.
Jack BeVier (51:04.66)