299: Home Ownership Rates & Build to Rent with John Burns RE Consulting's Chris Porter

This show is produced by the Hartman Media Company.

For more information and links to all.

Our great podcasts, visit hartmanmedia.com.

Welcome to the AIPIS show for accredited income property investment specialists and those who aspire to be if you're a real estate, mortgage or financial professional, this is the place for you. We'll explore innovative investment analysis, sales, marketing and income generating strategies for the most historically proven wealth creator income property. Learn from the experts as they show you how to build a better business and a better life.

It's my pleasure to welcome Chris Porter back to the show. He's a returning guest and he is senior Vice president and Chief Demographer at John Burns Consulting Course, is co author of Big Shifts Ahead, Head Demographic Clarity for Business and we're going to talk about a variety of topics today. I can't wait to dive in. Chris, welcome back. How are you?

Thanks so much, Jason. It's good to be here.

Are you coming to us from Irvine, California?

Yes, we're based here in Orange county, my old hometown.

Good stuff. We were talking off air a little bit and maybe this would be a good start to just talk about the completely sort of primitive style in which we still build homes. And you made the. Well, I don't think it was a joke. I want to say it was a joke that the. I'll let you tell the punchline. What's the biggest advancement in home construction?

Chris, this is one of our clients had mentioned this to me one time. He says, you know, it's the nail gun. I mean, you look at the last 50 years and really we have not made a ton of advances in building technology. I mean, I think there's a lot. We're making homes more efficient and more energy efficient. I think there are some advances being made, but really I think there's a lot more that can be done still.

There are. And of course that's a joke, but it's also true at the same time because from a broad look at things, certainly construction quality is much better. The efficiency of the supply chain with all the software and information technology is, is dramatically better. No one would deny that. But you know, it's still the same basic process. And I cannot believe we do not see more modular construction. Keep hearing about 3D printed homes. I don't think, I think that's sort of a myth. But you know, you can correct me if I'm wrong. It's the same basic process, you know, the way we built houses 100 years ago. What's going on?

You know, you're right. It is very similar to how we're doing before. Again, we are more efficient. I think the supply chain, as you mentioned, is a lot better. But I think we are going to get to the point where, and especially as we're dealing with a labor shortage right now in the construction industry, I think this is a great time for technology to step in and help us rethink the way that we build homes and in the future. So we have seen some of that technology, the 3D printed home, you know, you see a lot of videos on that online. I don't think that's going to catch on with the mainstream right away. And it's still very expensive at this point, but who knows down the road? And I think there's, there's a lot of countries, I mean you look at other countries around the world that are doing this, I think it's only natural we move in that, that direction.

And so on one side of it you've got this stigma from, I guess it's kind of an American stigma and I think it needs to go away, it needs to change. Where this old idea of a mobile home in a trailer park, A mobile home park. Now I own a mobile home park. And that's a great investment by the way. Not, not all of them. They can like anything, they can be problematic. But the stuff they can do nowadays that is modular is totally different than these old ideas from 30, 40, 50 years ago.

Right, you're exactly right. I mean if they can build a panel in a factory and really control the precision, I mean they have fantastic calibration on the precision of these, you know, where they're able to put nails in and actually reduce the amount of waste as well. Think about how they're cutting lumber to fit exactly and reduce on site waste. I think there's a lot of advantages and the fact that you're not necessarily limited by daytime hours, for example, example or by weather. So if you can build the pieces in a factory and assemble them on site, I think there are some real efficiencies that can be gained there.

There are. And you know, this whole stigma needs to change. I think it's really got to change and we've got to get more high tech about construction and this could lead to some relief in the cost of housing. And it can only be good. Right. We just got to move past this idea that of sticks and bricks for houses. It's just old fashioned. It needs to mature. Now. We investigated this because it sounded way too good to be true and it turns out it was you know, oh, you know, all the media loves to run with these articles and it's just a half baked story of oh, buy a $10,000 house on Amazon.com and have it delivered. And well, I called those vendors myself because I wanted to see what they'd say. And turns out by the time you're finished, it's $200 a square foot with engineering, construction plus land cost. So that didn't turn out to be anything like it was advertised.

And how big is the home?

Well, they, you know, some of them look pretty cool. They're not very big, but you know, they have like the container style homes, they have the log cabin style homes. And they had one that looked really cool that was $40,000. And I thought, I'm just going to start buying up little lots of land. I'm going to play developer myself, put a bunch of these on my lots and rent them out. It was nothing like it seemed. This is a myth. You've got to have the electrical, the plumbing, the H Vac, that you've got to hire engineers. You've got to get permitting. It's a whole big process.

Right.

It's almost like building a house.

And we've seen a little bit with the sort of that tiny home movement that was going around for a little while.

Yeah.

What we've heard is that after a year or so, some of the novelty of that just kind of wears off and they're ready for a little bit more space and a little bit more storage. So it was kind of a fad for a while. And I think we are looking, you know, there are certain segments of population want to sort of minimize, but in terms of a long growing trend, I think that tiny house movement is.

Yeah, it was a fad. It's funny speaking about this though, the changes in building styles, I mean, tell us about some of those changes because when you mentioned the tiny house thing, I think houses really could be smaller if they weren't designed so traditionally. You know, just a couple examples. Right. I used to have a really nice 38 foot motorhome and I loved it. It was amazing how much storage capacity was in that because instead of having a nightstand on either side of the bed, you know, you had built in cabinets and there was storage under the bed. The bed popped up and you could put stuff under there. We still have this idea of traditional furniture and traditional things. I also used to own a boat and that had a lot of storage. And then my girlfriend and I just went on a cruise about two months ago. In the Baltic Sea. And our little cabin on the boat had loads of storage in it. It's funny how houses just aren't very efficient in that sense. They really seem like they could be smaller and you could still have as good a lifestyle if they were just more efficient.

Yeah. And I think what we've seen is function really matters to buyers today. They like design and they like space, but function is something that they're really willing to pay for. Will this home work for my family and I? So that's a big priority, I think, for buyers today.

Any good innovations you want to share with our audience on that front? You know, any things builders are doing? I mean, and I know it's not your. Maybe your beat or your department in the company, but, you know, John Burns is always putting out various things about changing styles and what buyers are wanting and such.

You're right, it's not exactly my beat. But I can speak to a few things. I think one thing is the idea of the outdoor indoor space or indoor outdoor space. I think more people are living part of their life outside, and so they consider their yard and their patio space as part of the indoors almost. And so they may not need as much space physically in the home, but if they've got that extra space outside that they can use for multifunction purposes. So if they're eating out there, they, you know, might set up a flat screen TV outside. Just a place to really congregate and bring people together. That feels like part of the home as well. So that's. I think that's one thing we've seen for a while now, and it's still very, very popular with buyers today.

It's a good trend. I like it myself, personally.

And you see a lot of companies on the building product side that are catering to this. You know, there's one company that I'm aware of that makes these huge sliding windows that really allow you to open up that space. And there's no problems with flow between the inside and the outside of the home. But then at the end of the day, you can still close that up and you've got the nice views, but you've got a little bit of that separation between indoor and outdoor for security and for weather as well. I think we see that as a continuing trend. The idea of bringing the outdoors in and the indoors out as well.

Yeah, that's good. Good stuff. Okay, great. If we've kind of covered this topic a bit, let's switch gears. Anything you want to share demographics, that is your thing. Anything you want to share on demographics and how that's impacting the market or, or really anything else, we've got a bunch of stuff to cover.

Sure. So I think one of the things we had talked about in the pre call was just where some of the big shifts that we're seeing right now in housing and I can relate some of this back to demographics as well, but I think we're kind of at a bit of an inflection point in the market right now. We're starting to see home sales slow a bit, leveling off around 5.3 million across the country. And that's on the existing home side. We're calling for a slight dip in home sales this year versus last year. But I think the low mortgage rates in the US have just really helped that from falling further as we look forward. We haven't really seen mortgage rates this low since late 2016. We're talking about a 3.55% mortgage rate nationally.

Yeah, it really is amazing.

It is. I think the other thing is we are continuing to see a shift to the entry level buyer. You've seen a lot of builders pivot to really target that consumer.

It doesn't feel that way, but versus the market we had before the Great Recession, there was a good amount of KB homes, Dr. Horton, you know, entry level stuff out there and it, it doesn't feel like that yet. Now Dr. Horton recently came out with a statement that they were committed to providing entry level housing. So that's good.

But yeah, I think you've seen a lot of builders say look that we realize this is a growing target for us and pivot some of their strategies, opening up new brands that really do target a more entry level style home. So I do think there's a lot of opportunity there. What we're seeing though, and we can talk about this a little bit later as well, but from a demographics perspective, I mean it is a little bit of a delayed buyer. So they have maybe they've invested in their education, they've gone to college, more of them have gone to college in the past. Then they have the student debt on top of that that they've got to pay off. But once they are buying, hopefully they've made a good investment in their education, it's paying off in terms of their salaries and allowing them to buy homes. So I do think there is a especially as we look at this group born in the 1980s and then the group that is now coming of age born in the 1990s, they are reaching those years where they are forming their households and buying homes. And I think we are going to see some pickup in the home buying segment, really, just as a matter of demographics. Even if it is delayed, their numbers are just still so big.

Meaning there are so many millennials out there that need to buy about 80 million. Right? Is that what you're referring to? Okay, they're moving out of their parents house finally. They're definitely impacting the rental market, a lot of them renting, but ultimately they're going to move into the homeownership market is what you're saying, right down the road.

And it's going to be a bit delayed from where they, you know, their parents or the grandparents were at the same age. But you know, you look at survey after survey and we're still led to believe that everybody wants to, or not everybody, but the majority still want to own a home at some point in their lives. Yeah, it's just taking a little bit longer.

Right, Right. Okay. Okay, good. And what about the baby boomers moving out and renting their new house? But then there's a lot of, you know, there's a lot of talk about aging in place. I mean, there's some kind of, a lot of conflicting stuff here and I don't, I don't know what to make of it. Thoughts?

You're right, it is kind of conflicting. We, I mean, I naively, before I got into the homebuilding arena, used to think, well, once you retire, you just pack up and move to Arizona or move to Florida and, and that's it. But it's really, that's really not the case. I mean, you do see this preference to, to age. I look at my own parents, they live in Michigan. After a couple brutal winters, we thought for sure they were going to move to the South. But it's hard to leave your community that you've built up for the last 30, 35 years. I think they'll eventually move, but for now they're staying put and they're actually built a new house in Michigan. So I think great majority of people do tend to age in place. So I think there's some real good positive upside for the remodeling market in that respect and that they're helping. They're going to need to improve their homes to make sure that they're livable in their older age. But one of the things we've also seen is a growing preference for renting amongst the older households. You know, part of that I think was driven by the Great Recession when the housing market Crashed. We did see people out of financial necessity turn to renting as opposed to owning a home, and maybe they got foreclosed upon. But I think there's a preference shift as well, and it's not. But I do think there's a greater percentage of older adults who are saying, you know what? I like the flexibility that renting gives me. It allows me to go on vacation and let somebody else worry about the maintenance of the yard or the home while I'm gone. And I think, especially as they're traveling to be near their kids or their grandkids, that is something that's important to them is having that flexibility.

Yeah, I couldn't agree with you more. See that stigma, the stigma of being a renter versus being a homeowner, that seems to have dissipated. It hasn't quite happened in the modular home discussion. So I'm hoping we'll see it there too, because some of these modular homes are fantastic. I mean, the product is really good. So. Yeah.

I also think the single family rental market has opened up a huge opportunity for these older homeowners. Excuse me, older households as well.

Yeah, the big institutional investors like invitation homes. Sure, sure, absolutely.

If you look at the rental housing market across the country, a third, fully a third of all renters in the US Are renting a single family detached home. That's been going on for decades. It's gotten a lot of press in the wake of this institutionalization of that space. But now that you've got these companies that are managing them and managing them in mass quantities, I do think it provides a great opportunity for somebody to rent. And they're not having to rent an apartment. Not that there's anything wrong with that, but if they, you know, they've accumulated things over their lifetime and they just can't themselves moving into a really small space and putting all their stuff in storage. They could rent a detached home, still have the space, but have the flexibility of being a renter as well.

I agree with you. I agree. That's neat trend. Now, do you think, Chris, that the institutional owners are in it for the long haul or are they. Are you seeing any, like, activity of. They think, hey, they've made some money the past several years, it's time to start unloading these assets and I don't know, buy something else with their, you know, do some private equity deals or whatever they're going to do. Right.

I think it really has become a very established asset class and I think that there is a long. This really does have some legs to It. I think it's going to have a long future. I think the challenge has been now that they've swooped up a lot of the distressed properties out there, it's finding the next batch of homes to buy up. We've actually seen an emergence of the build for rent concept where these companies are looking at how do we build an entire community? Rather than having random homes scattered throughout a metro area, they bought up individual homes. How do we actually build a community that's designed to be a rental, but it's detached homes and manage that? I mean, there's some great efficiencies there by being able to do it all in one neighborhood or one community.

Sure, absolutely. I call that a. And maybe you call it the same, the horizontal apartment complex. In other words, it doesn't go up like a lot of them do, it just goes horizontal. Right? Yeah.

Right. Well, so I would make a little bit of a distinction there. So there are some horizontal apartments that really just do feel like apartment buildings, but they're. We've also seen some really nice, nicely well done detached homes that really look no different from the home you might see on your street, but really built with the renter in mind. And it also affects the types of products they put in the home. They want something that's going to be durable. That space continues to evolve and I think we're going to see more and more of builders looking at how do we incorporate rental homes into our communities.

I think it's a really interesting trend and that is a huge shift. We have never seen that before in our history. That's a real change post great recession. That looks like it's going to be with us for a while. You guys coined the term Serban, a mix of urban and suburban. What is urban really?

It's the idea of bringing those urban conveniences to traditionally suburban environments. I think it's something that the suburbs have seen the investments that big cities have made in their downtowns and seen the benefits that those big cities have reaped from those investments. And the suburbs say we want of that as well. And so it's really a planned, strategic move on the part of the suburbs to develop their downtowns, create many downtowns where maybe they didn't exist before. It's got a mixture of retail, of restaurants, of maybe some office and some residential as well. The idea that you could live, work and play all in the same area. You might not need a car during the week, but you might want a car on the weekends if you want to get out of town, for example. But the idea is really bringing that those urban conveniences to these suburban areas. I think it's been something that's been highly in demand by the groups born in the 80s and the 90s, the millennials, as they tend to live in the cities when they were in their 20s, and now they're moving out to the suburbs. As they start to have families and move out for affordability or move for better schools, they're demanding some of those same urban conveniences. And so I think that the combination of the suburbs investing in their downtowns and these millennials moving into the suburbs is really helping this idea to gain further traction.

I'm going to feign a little bit of naivete here. What are those amenities?

So you've got really. It's kind of walkability. It's having a downtown Main street atmosphere. We know that people tend to move out of the cities for school quality, for example. So in the suburbs, you have better schools than you might have in an urban area. You've got lower crime in the suburbs than you do in the urban areas, for example. And so that's part of it. There's also just the idea of having that walkability of retail and restaurants somewhere where you could park the car and you could still walk around for a couple hours and eat dinner, go shopping. And for some people, that might be the same place where they work as well. It might be a walk to the restaurants from their office and then another walk back to their apartment or condominium.

Yeah, good stuff. Chris, we've maybe addressed this already, but just any other shifts you're seeing now in, you know, housing styles, what people want? Just. I wanted to just ask you one more time. Is there anything else we didn't discuss on that side?

I mean, there's a lot that I could. I could speak to on that. I think at the moment, nothing's. Nothing's jumping out right at me. I think that indoor outdoor space is a big. A big deal for people and function. How do I make the homework for.

Me make it more functional? Yeah, good stuff. Anything else you want to share before we wrap it up?

Sure. You know, one of the things we talked about a little bit was the delays in homeownership, and maybe I just addressed that a little bit. Is a demographic issue. I don't know. Maybe it's not that controversial, but I think it is because I studied this for a while. You know, the census has been reporting homeownership going up nationally for the last couple of years, and it's dropped a little bit in the last couple of quarters. But, you know, we're fully a point or two above where we we were back in 2016. You know, we made the call about three and a half years ago, and somewhat controversial at the time, that homeownership was going to continue to go down in the US really demographically driven, just as we saw these big waves of young adults coming of age and renting. And then on the other end of the age spectrum, a large number of people aging into those years where they're either passing away or they're going into assisted living. And there are 80% homeowners, and everybody in between was less likely to own a home than their parents or grandparents of the same age. So we made the call. We thought homeownership was going to continue to fall. We think that maybe the homeownership rate hasn't fallen that much as we were forecasting because we've had lower than expected mortgage rates. And we also think that lending practices have been a bit looser than maybe what we would have been led to believe by the guidelines Dodd Frank established.

Yeah, it doesn't feel that way. Anecdotally, it sure seems like getting a loan is pretty tough nowadays, but yeah.

I mean, there's definitely some areas where I think it is. You know, you still have to have good documentation and you have to have good credit scores. But I also think we're seeing higher loan to value ratios than maybe we thought we would debt to income ratios. And then, you know, you see all these stories in the newspaper about alternative loans popping up here and there starting to emerge. And so, you know, I think it's not as tight as we thought maybe it would have been. But yes, still much tighter than it was before.

Yeah.

Back in the mid 2000s.

No question about that.

As I look at the census numbers, if we were seeing the kinds of growth in the absolute number of homeowners that the census numbers are saying, I think we'd be seeing higher existing home sales and I think our builder clients would be jumping for joy. And I think the census is also reporting some declines and overall declines in the overall number of renters in the country. And we're just not hearing that from either our apartment clients or our single family rental clients. So it's a bit of a conundrum for me. I'm trying to figure out, make some sense of the census numbers, but I do think we are heading towards more of a rentership society. We're never going to get to the point I don't think where it's 50, 50, but I don't see homeownership shooting back up to 68%, 69% anytime soon.

And you know what, Chris? I think that's fine. There's nothing wrong with that. I think that's healthy. And you know what changed my opinion on this? And I've been saying this for years. I can't remember when the article came out. But you, I'm sure, sure you're familiar with it. It was on the COVID of I think Newsweek or maybe Time, and it talked about how home ownership, the whole issue was like dedicated to this, how home ownership was not the panacea we thought it was and how actually when the homeownership rates are high in certain cities or neighborhoods, it stifles growth. And for 10 years I've been saying the best thing you can have on a resume is mobility to be able to move to where the jobs are. And I've also been saying that I think the ideal homeownership rate, and admittedly this is not very data driven. It's just my impression is about 55%. That's what it should be, I think. And you know, to hear anybody in real estate say that and they think it's blasphemy, but like, why does everyone need to own a house? It's a crazy George Bush idea.

It doesn't make any sense. It makes people immobile. You know, if, if you can move to where better opportunities are, to another city or across town, that's a good thing.

I would agree.

Yeah.

Yeah. And I think, you know, the fact that we did have such high homeownership rates, I mean, people, homeowners are less likely to move than renters. We know that.

It's stifling. It's stifling.

And so when you look at the overall mobility in the country, I mean, it's been going down for decades. And partially that's partially driven by the fact that we're really pushing home ownership and we just know that people are less likely to move once they own a home. So it shouldn't come as any surprise to us that overall mobility is slowing because we've had just such high homeownership rates.

Yeah, absolutely. That's great point. I'm glad we agree on that. One last thing before you go, Chris. When John Burns spoke at our event a year and a half ago at one of our conferences, he talked about how in the book that you co wrote with him about how you don't look at the Demographic cohorts the same way most demographers do. You know, they'll say millennials, Gen X, I'm a Gen Xer, baby boomers, et cetera. And then Gen Z coming up. Right. You take it in the decade by decade, which I think is a much more precise way to look at it. And John, when he was on stage, gave the example of, I think, his daughter and Mark Zuckerberg. And they're both millennials, but they're completely different people. Right, exactly. And do you just want to speak to that a little bit? Because everybody's throwing around millennials, baby boomers. It's really not precise enough, is it?

It's not. So for that very reason. The example I always use is my dad, who was born at the beginning of the baby boom, and George Clooney, who was born at the end of the baby boom. And they've had very different lives based on the events that occurred from their early childhood to their adulthood. Today my dad's retired, George Clooney is still out there working and, you know, making movies and TV shows and all that. So you're right. I mean, I just. We'll take the boomers, for example, 1946 to 1964. That's pretty widely agreed upon, but that's 19 years of people, and you just can't make a comparison. It's not a meaningful conversation when you talk about boomers as one big collective group. So we did break down the generations into nice 10 year increments, really, based on the decade you're born in. It makes the analysis really easy for us because I can divide by 10 or multiply by 10. But really what it does is it allows us to see which are the groups that really shifted the needle. Either they accelerated some of the trends or they reversed some of the trends as well. For example, we could look at the group born in the 1960s. We call them the Equalers. That was the first generation for which more women graduated from college than men. Now we can say that was the group born in the 1960s. It doesn't have quite the same impact. If you say, well, it was the late boomers and the early Gen X that really made the shift. I think we can pinpoint and say it was the group one in the 60s.

It's much easier to quantify who those people are, because, hey, you know, if you were born in the 60s or.

Not exactly, everybody knows what year they're born. And it's just, it's nice, easy to manage definitions. And I always give this example of how do you define a millennial? And I've got articles from the press that show, you know, the earliest millennials starting in 1975 and the latest of them being born in 2010, excuse me, 2000. It's too hard to manage a group of that size and nobody can agree on the definition of the group. So we said, let's just make it easy. And based on the decade people were.

Born in, yeah, that's a much better thing. Much better way to go. I wish it was more widely adopted, but hopefully you guys will change the way people look at this.

We hope. And maybe this podcast will inspire somebody to think that way, too.

Hopefully there are a lot of other demographers listening who will start speaking in this way. Chris, give out your website.

Sure. It's realestate consulting.com. we also have a website, bigshifts ahead.com is the website for the book.

For the book. And the book is great, by the way. We gave them out at our event and I've still got a little few left here. I give them out once in a while to whoever again left over from the event. So, Chris Porter, thanks again for joining us. It's always good to have you on the show.

Thanks, Jason.

Thank you so much for listening. Please be sure to subscribe so that you don't miss miss any episodes. Be sure to check out the show's specific website and our general website, hartmanmedia.com for appropriate disclaimers and terms of service. Remember that guest opinions are their own and if you require specific legal or tax advice or advice in any other specialized area, please consult an appropriate professional. And we also very much appreciate you reviewing the show. Please go to itunes or Stitcher Radio or whatever platform you're using and write.

A review for the show.

We would very much appreciate that. And be sure to make it official and subscribe so you do not miss any episodes. We look forward to seeing you on the next episode.