AIPIS 218 - The 5 Market Types in the USA with John Burns

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It's my pleasure to welcome John Burns back to the show. He is a returning guest. He is founder and CEO of John Burns Real Estate Consulting and his materials often discussed on our show even, even when he's not here. John, welcome. We absolutely love all the research you do and have talked about it many times on, on the show. So it's great to have you here in person.

Thanks, Jason. I always learn a lot from you as well.

Yeah. Well, welcome back. We're also excited to have you speaking at our upcoming Meet the Masters of Income Property event in La Jolla, California in January. So we can't wait to hear what you have to say there. But let's talk about some of the big stuff that's going on out there in the marketplace. One thing that is in the news constantly and unless you have some inside information, I certainly don't. Amazon.com is going to set up a second campus. I guess cities around the country are vying for the opportunity to have them. Right.

It's going to be very interesting to see how many cities submit. I would not be surprised to see 100. It looks like there's going to be two bids just from Orange County, California, where I live. And if you could pick a more business unfriendly state than California, I'd be surprised. So I don't, I don't think we're going to get it.

They could always move to New York. Right. And that'd be just about as unfriendly as California, Connecticut. Yeah, exactly, exactly.

My money's on Denver, for what it's worth.

Oh, it is. Okay, good. Yeah, good to know. Good to know. And you know, off tape, when we were talking before we started the show today, you were talking about some of the great growth markets being kind of in the middle of the country, the business friendly, low regulation places. Do you want to kind of expand on that idea for the listeners?

So the coasts have gotten just way too expensive and young adults, call them millennials, if you will, are looking for affordable, fun places to live. And they're finding Denver, Austin, Dallas. I think Phoenix is finally making a comeback too. Nashville, these are the hot growth markets. I'm sure they're all at the top of Amazon's list if they've got a good airport. That's the other thing is a good airport is critical. A pro growth governor may sound silly, but I think there's an element of truth to it. Legalizing marijuana in Colorado a few years ago, it wasn't just about the marijuana. It was sending a message that, hey, we're accepting of this type of lifestyle and the young adult growth there has just been unbelievable.

The marijuana thing's really quite fascinating. If you want your employees to be lazy and stoned, come to a marijuana legal state. Right?

Oh boy.

Yeah, that's exactly right. I'm sure there are good jobs are testing for that.

Yeah, yeah, that's interesting. But I guess it makes people a little more creative, so we'll give them that for sure. The more creative class type people. You know, all of those cities that you mentioned, you know, are cities that we have done business in at one point and they all kind of got a little too expensive for us to recommend to investors just as yield, you know, cash flow oriented investors. And we've talked about this before, John, but we generally classify things into kind of three types of markets. The, the linear markets, the hybrid markets, and the cyclical markets. Of course, you live in Orange county still. I used to live there for many years. And I call that a cyclical market. You know, any of the expensive markets are cyclical and, and then the, the hybrid and the linear type markets, and I would call all of those markets that you mentioned, hybrid markets. And you know, where they're, they're kind of in between the two. They're not crazy cyclical, like South Florida, for example. Totally cyclical. Kind of in between the two. Do you classify things that way at all? You next I want to go to demographics because you, I think do a better job classifying the cohorts than the millennial baby boomer or Gen X concept.

Yeah, we've got five classifications we use. I don't remember them all off the top of my head, but maybe let me expand a little bit. So what you're calling cyclical is the expensive markets that they're so supply constrained that they have a couple years of surging demand, they can't meet it, and prices go through the roof. And the minute we have a recession, prices crater. There's another type of cycle I look at though, which is the market Markets that can really ramp up in supply. And I would put the Texas markets there. Historically they don't cycle because they get too expensive. They cycle because there's so much supply being built and then there's a recession, they get crushed. I like to break the cyclical markets up into two pieces. One that cycle based on price and the other cycle based on brand new construction, if you will.

Right. And so in other words, what you're saying there is the ability to meet the supply demands quickly. In other words, where there's a very pro growth attitude, limited zoning. Houston is probably the poster child for this. Remember back in the old days, the billboard, well, the last person to leave Houston, please turn out the lights during the, you know, when it was a very oil based economy. It's more diversified now, fortunately. But the markets that are cyclical can't meet the supply demand when there's an upsurge.

Right, right. Yeah, right. And that's why prices go through the roof.

Yeah, right.

And interestingly a lot of people aren't aware of this. Houston went through a oversupply cycle earlier this year. The apartment market got completely overbuilt. They were giving away two months of free rent and then the hurricane came along and wiped out all the units and they all got occupied.

Yeah, right.

So I mean we've had a very recent example of even a market like Houston getting overbuilt.

Yeah, very interesting, very interesting. Okay. Hopefully we'll have time to talk about apartments and millennia. Well, finish your, your thought on the different types of markets, if you would. Sorry about that.

That's okay. So, and then the linear markets, I'm guessing you're the ones that you're considering just steady Eddy, never get overheated, never really crash. And that's most of the country. And that's some of the markets you were describing to me earlier that you've been looking at. Memphis and Oklahoma City and Indianapolis and Little Rock. Those are linear markets. I think your definition of hybrid is a good one for some of the markets I mentioned, like Austin and Denver and Dallas historically. Well, at least Austin and Denver historically don't get oversupplied or get too expensive. But in this cycle they have because there was this much job growth that even the relative the market being relatively easy to supply, new construction, there's been more than enough demand for all of it. Austin is approaching an all time high of home prices in relation to income. There's a lot of markets that are getting up there with payments in relation to income, but price in relation to income. That's pretty rare in a 4 interest rate environment. So I would agree with you that Austin best days are behind it from a price appreciation standpoint, I think.

Yeah, yeah. Interesting. So you talked about Houston and how the apartments got overbuilt. I remember, you know, just a, what, five, six years ago, it seemed like there were cranes everywhere building apartments, just every city I'd visit and I'm constantly traveling around the country. Have we overbuilt apartments yet or are the demand still there?

And apartment dwellers, there's about 12 cities and really in the city itself where all the construction seems to have been going on. And almost all of those markets, I was going to say except Seattle, although Seattle is starting to roll over a little bit right now too. Got overbuilt. And it's not just overbuilt in terms of numbers. By the time they came to market with the construction cost increases they've seen, they were really pushing rents and targeting just a very few affluent folks. Those submarkets are overbuilt and they were driven by pension fund capital who said, you know, I'm not going to get fired by building in Seattle or San Francisco or Dallas. I see the world shifting right now more towards suburban apartments being driven by more local money instead of big institutional money. And there's plenty of demand for those. So that I don't think the apartment market is overbuilt nationally very much, but those certain sub markets, they are right, Right.

Okay, now what about about the housing market? And before you answer, it all depends on the type of homes builders are building. Now this is just an anecdotal observation. Correct me if I'm wrong, but it feels like builders haven't been building on this side of the cycle. I mean, before the Great Recession it seemed like there were a lot of entry level homes. And the reason I know this is because investors bought a lot of them, our clients bought a lot of them. We've seen to sell properties for Dr. Horton and Pulte and you know, all the big builders like crazy. And this time around it seems like they're just not building as much in the entry level category. Is that true? Is that like factually or is that just my perception?

That's very true. It's starting to shift though. So what has changed is that first of all their costs have gone through the roof and it's more at the local level than anything else. But if they could build a $300,000 home in California or a $200,000 home in Vegas, where You live. They would. And sell it profitably. They would. They just can't. So that's been problem number one. The second thing is the demographics for the last 10 years have been a huge growth of the number of people in the country aged in their 20s who are also delaying marriage and childbirth. So we saw, I think it was 5 million more people from 2005 to 2015 in that demographic. And, hey, you want to live close to work, you want to live close to. Fun stuff to do. The affordable housing is in the outlying areas. But what is shifting now is that demographic growth, which there was very little growth of people in their 30s, is now changing. And we're seeing those millennials who are going urban now, starting families and having kids and starting to commute. And the builders have responded to that by starting to move to the exurbs and building more affordable homes than they're building closer in. But it's really difficult to bring it at the price points that they'd like to. So they may be. They're charged at 250 grand and when the heart of the market should be 200.

Yeah, very interesting. You just reminded me. I gave a talk to a group of developers recently, and I actually quoted you because I quoted your word Serban. Guess you made that one up. And it's a great word. Tell us what cerban means.

Yeah, so we did trademark it, even. But anyone's welcome to use it. The governments in big cities have put so much money into redeveloping their urban areas the last 20 or 30 years that that was one of the reasons why urban is really revitalized. And the suburbs have now said, hey, we'd like some of that in our city. So when I got into this business, suburbs were saying, give me as few homes as possible on a big a lot as possible. And now the cities are saying the exact opposite. I want a lot of density close to my urban core. I want to redevelop our old downtown. And that's, believe it or not, that's where a lot of people want to go. If you're a young couple, you're close to stuff to do, and you're in a good school district, and it's more affordable than an urban area. So it's bringing the best of urban to the suburbs. The other thing we've noticed is a lot of empty nesters. Homeowners are actually selling their homes and choosing to rent for a while, and that's very popular with them too. Hey, let's go rent in the new apartment. Complex near downtown. And we've been doing a lot of feasibility on that for the last seven or eight years.

Very interesting. So I want to ask you to kind of correct the perceptions and clarify them on the generational cohorts, because your book divides them based on the decade they're born, which is more exacting than these kind of. We all throw around millennial, you know, Gen Y, baby boomers, Gen X, I'm a Gen Xer. Tell us about the demographics. And then I want to ask you how they're acting and who's most impactful on the housing market.

Yeah. So there are times when you can make a generalization about millennials, but you have to remember that mark Zuckerberg, who's 33 years old, is a millennial, and my daughter Kelsey, who a senior in high school, as a millennial. So if you're going to be talking about housing, they're in kind of different stages of their lives.

Certainly, certainly with the money they have.

They are, but definitely with the money. So we broke the generations down by decade born because everybody relates to their decade. They relate to their high school class. And you're comparing nice 10 year period. That was some of this. Other problems is you're comparing Gen X to millennials, and one 17 years long and the other is 19. In fact, people don't even agree on how long they are. Everybody knows how long a decade is. Plus 13% of the country was born in another country. And a lot of that discussion is about American born folks. But you're leaving out 1/6 of the population when you do that.

Right.

We're looking at the country, when were you born and when we did that. One of the biggest findings is each decade from the 1950s through now is 40 to 44 million in size. There's really not much of a boom in a Boston and Echo boom anymore because immigration filled in that gap of people that are now aged in their 30s and 40s.

I agree with you. Doing it by decade. You're born, it's much easier. And I mean, are they going to act a lot differently? Like you gave the example of your daughter, who's a senior in High School versus a 33 year old. They're both millennials. Great point. How much different will they act or how much different will their housing choices be?

This really helped me figure out the answer to that question, because what happens to you when you're a young kid and a teenager and what happens to you when you graduate from school and get your first job really impacts your behavior. Later in life, we documented this going all the way back to the group born in the 1930s. So Warren Buffett's generation, born in the 1930s, was born into the Great Depression and had food rationing during World War II. As kids, they did not borrow a lot of money. They were savers. They got to an 80% home ownership rate. Fast forward to kids born in the 90s and 2000s. They saw what happened when you have too much debt to their parents and their friends parents, and they're using debit cards today, not credit cards. They're afraid of debt. And there's plenty of similarities I can draw here, but looking at what happens to you early in your life, I definitely think impacts your attitude moving forward.

I would totally agree with you when it comes to what everybody calls the millennials, who are now in the older end of the millennial spectrum, who were teenagers, arguably the most impressionable point in their life, when they saw their parents get burned in the housing market. I mean, to me, that says these people aren't like, running out to buy a house. Of course, there's a ton of other factors. They have giant student loan debt. They have a mortgage that they didn't get a house with, and that's their student loan. As I always say, the best thing you can have on a, on a resume for jobs is mobility. I think their whole view of life is like a much more more portable world. Everything is smaller and more compact and more portable. Look at the computers in all of our pockets. They're in the, like, the sharing economy era. You know, they ride share. A lot of them don't care about having a car anymore. You know, they use Airbnb. They just have a much more portable view of life, don't they?

We nicknamed those born in the 1980s the sharers because they're the ones who invented the sharing economy. All these disruptors and all these unicorns seemed to be the kids born in the 1980s. And they were the ones who were told, go get a college degree and you're going to be fine. They got their college degree and then they ended up with a retail job for six years because the economy was terrible. So, of course, they got started later in life. But I actually think that group is extremely resilient. They're starting a lot of companies, they're disrupting a lot of businesses. There's been a lot of badmouthing of them for living with their parents. But if you do the consumer research we're doing, both they and their parents are saying, hey, this is financially smart to live with mom and dad. It's not so much that they're a deadbeat. And I should say that the GDP growth during their lifetimes is half of what it was for those born during the 1930s and 1940s. How are you going to blame that on them? You can't. They're just being smart.

Yeah, very interesting. Okay, good, good stuff. John, are there any questions I haven't asked you any things that you'd like to share with our listeners before we wrap it up?

I'll handle one more decade if you don't mind because I think this may resonate. So you talked about the foreclosure distress. So those born in the 1970s who are now 38 to 47 years old are supposed to be in their peak spending years in the heart of our economy.

So what was happening to them in the early 2000s? They were in their 20s and they were having kids and they were starting families and mortgage credit was really easy. So at their 10 year high school reunion they had the highest homeownership rate ever of any group. At their 10 year high school reunion. At their 20 year high school reunion they are 10% behind prior generations. That's the group that just got crushed during the Great Recession. And that's one of the reasons why I don't think the economy is coming back as strong is because that group who should be our big spenders got crushed.

And I agree with that. I think the wild card is, is maybe the inheritance issue, right? I mean eventually they're going to inherit some money from their, their folks. I mean, is that almost impossible to calculate or equate? I don't know.

I think it's true. But when do your parents pass away? In their 80s? Yeah, you'll get it in your late 50s or early 60s. So maybe there is a cushion there at some point, but the they don't have the money to spend today.

Yeah, right, right. You know, interesting, interesting stuff. Well, good stuff. You know, I really enjoyed the report that you did on the self driving cars and or otherwise known as autonomous vehicles. I think that's a pretty big game changer for real estate values. I don't know if you agree, but it seems to me like the three primary value drivers that have been with us since, since the beginning of time, even from cave days, right? Location, location, location. If transportation becomes easier and cheaper, at least in time, if not money, is that going to put downward pressure on the most well located properties and maybe some upward demand on the properties that aren't as well located. I mean the three blocks around your house, that matters for sure because that's the walkable portion. But I don't know if you have a 45 minute commute versus a 60 minute commute. Does it matter that much if you're not doing the driving?

So that's what I initially thought till we started doing a lot of research and thinking about it. So you're absolutely right that a 45 minute commute will be a lot easier. However, the other big change here is that we're not going to need all these parking lots and they're in great locations.

That I agree with. Yeah.

And Amazon is totally disrupting retail so we're not going to see a lot of. I think we're going to see a lot fewer retail centers too.

Yeah.

So what I think is going to happen is we're going to see a lot more opportunities to live close in that will still be more expensive than living in an outlying area. But I'm willing to bet that there's going to be more demand to live closer in and what you say will come true, but just not right away. It'll take a little bit longer.

Yeah, that's an interesting point. In fact I remember reading, and I've talked about that before, before that like the typical city has 40% of its land covered by parking spaces. Right. And I don't know what the real number is. That's the number I just remember. Maybe you have a real number but you know, if the cars are truly on demand and not owned cars, if they're all sharing, you know, rideshare, well not even rideshare but you know, self driving, car pick share, pixie you up and the cars never have to really stop moving and they never have to park. They can just run 24, seven pretty much. Boy, you know, everybody's garage and driveway and the suburbs becomes an extra room, maybe a den or something. The cities, the parking lots, the parking spaces, the streets get wider. I don't know. There's a lot of implications, aren't there?

We'll be to able to use the driveways for other things. There's a lot of implications here. I was just in San Antonio and somebody with the city told ME More than 50% of downtown San Antonio was parking. So there's a stat proving you're right.

Yeah, that's, that's super. I mean it takes a long time to make those changes though. Things move surprisingly slowly when it comes to rezoning things and entitlements and. But you know, you know, these big box retail centers, I mean, wow, that's a lot of, lot of real estate there that could be reused for something else.

Right, right. And there's a lot of people looking at that right now. And I think that those ratio retail centers are the ones that cities are going to want to be redeveloped into suburban housing. So I think the Serbian term is really going to take off.

Yeah. Yeah, I think so, too. Good stuff.

John, give out your website, real estate consulting.com and where can people get the book?

Of course, name of the book and you know where they should get it.

The name of the book is Big Shifts Ahead and it's available on all the Internet sites. Amazon would be the most obvious one.

Excellent, Excellent. Good stuff. Well, John Burns. John Burns, Real Estate Consulting, thank you so much for joining us today.

You're welcome, Jason.

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Welcome to Meet the masters of Income Property Investing. I'm your host, Jason Hartman.

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Sam.