AIPIS 241 - Are Millennials the Renter Generation? with Ali Wolf

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It's my pleasure to welcome Ali Wolf to the show. She's an economist with Myers Research. Jeff Myers is a very old friend of mine, known him for many years and he's got a great company that provides consulting services to home builders and developers. Developers also they have a new software product that is called Zonda. It's a pleasure to have Ali here with us today. How are you, Ali?

Hi Jason. I'm good. Thank you so much for chatting with me today.

Yeah, it's good to have you. And you're coming to us from my former home city, Irvine, California, is that correct?

Irvine, yes, it's beautiful and sunny as always.

Good stuff. Well, hey, what is going on in the housing market? A lot of people talk about the business cycle. I know that in meetings you've had recently, a lot of people are saying, are we at the end of the business cycle and you know, where things are about to change. But you know, we debated a little earlier this morning on that timing question. Maybe that's not everything, of course, but tell us what your take is.

Yeah, of course. So that question is endless for me. I go across the country, I talk to builders and developers and people are at the point that they can rattle off that we're on the third longest expansion in history. And they say, well, geez, if we're on a long expansion, that means it's inevitably going to end. And that's where I like to swoop in and say, well, no, because expansions don't die of old age. There's normally something that causes a disruption. There's normally something that causes a slowdown. And so if you look at just the length of the cycle, you have to keep in mind a, that it was an anemic growth to begin with and we just kind of starting to see that robust activity a bit later down the road. But what gives me a lot of comfort is housing didn't lead us out of this downturn like it did last time. And when you look at housing, people forget that when you buy homes it's not just the sale of the home. You are working with either the sales agent or the realtor. You buy your house, you want to go to, I don't know, Z gallery and buy a new couch or maybe you want to install an air conditioning. There are so many things down the line once a home is sold that stimulate the economy not only by putting more money into the system, but keep people employed from the retail worker up to the kind of the corporate level person. So the fact that we're still seeing steady growth in sales, to me is saying that's okay because that's filtering throughout, trickling into the rest of the economy.

Yeah, very interesting. You know, Ali, I would argue, and you know, feel free to take issue with my theory or agree with me whatever you like, but I would argue that I think, number one, the business cycle argument is massively over simplistic in our incredibly complicated economy. But number two, if you're going to go with the cycle and people are going to make this argument about the business cycle and the length of the expansion that, you know, every seven to ten years we have a downturn, et cetera, et cetera, we've all heard it then you would have to start that clock probably at 2012, not 2009 or 10 because the trough that we from which we started was so low. It was the worst economic recession in seven decades. So I think that your starting point needs to be later.

Expanding off an incredible historic low. I don't think you can really count it that way. Do you give any credence to that argument?

No, I think that's a great argument because of that anemic growth that we both were mentioning. It starts to. Your expansion starts a bit later even though you were growing. What I look at is when you get to full employment. And so no, I'm not saying that's where it starts, that you need to be looking at it. But typically when you get to full employment, that's the start of this is going to sound alarmist, but a ticking time bomb. So once you get to full employment, you just start to be looking out for signs of overheating because you do have people that are fully employed, but we aren't seeing that kind of wage growth that normally goes along with getting to a point of full employment. And so we struggle with this because the unemployment rate is so widely cited and people say, oh well, the unemployment rate is so low. So that is the point of full employment. Theoretically. What I like to look at to know that's true is the Quits ratio. I love this ratio because it's telling you a gauge of not only consumer confidence, but in theory it's going to tell you wages too. And it's going to give you a place of where we are in the economy. So what we're seeing.

So what is that? Just make sure you tell people what that is. The quits ratio.

Yeah. So the quits ratio is this really cool data that comes from the Bureau of Labor Statistics that looks at people that are.

Actively choosing to quit their job and go to another job. And it is close to an all time high. And we know people are quitting because maybe there's a better opportunity out there and maybe they can get more money. And so if people are willing to quit, to me that's a really strong sign of they still think the economy is going in the right direction. A normal person. And yeah, they're probably going to get a bump in their income by leaving.

Right, right. So they're choosing to quit because maybe they're pursuing an entrepreneurial opportunity or they're just, they've got a better offer. And of course, Ali, one of the things that, you know, I think is so mistaken about employment stats is the discouraged worker concept, you know, that it really isn't counted in the jobless claims. Of course. And so that's a kind of the opposite end of that discussion. But tell us more about the quits ratio and give us some, you know, data points or history on that, if you would.

Yeah, so you saw it, it basically mimics the business cycle. So you would see it going up. During the last downturn, you saw it just completely dropped because people that had jobs wanted to stay put. And then we've gradually been seeing it increase and increase, but now it's close. I think it's the second highest level it's been in history. So we are just seeing people are saying, hey, I feel good to leave. And when we look at the employment market too, a different question I get and kind of going back to the business cycle is what are some indicators I should be watching? What are some leading indicators? Jason, I'd be curious what you would add to mine, but I've identified the of some three and one also has to do with the labor market to give people another early warning sign. Despite.

If they're looking at all these other data points, these are the ones that I think are most critical. So initial jobless claims, do you follow those at all? Yeah. Okay. So I love initial jobless claims over non farm payrolls because they come out Weekly. And so when you look at initial jobless claims, they start to spike right before a recession. And we're seeing that they're still on this level long stretch of being under 300,000, which is an indication of a really healthy market. If you go back in history, non farm payrolls did not give you an early warning sign. They started to go negative in January 2008. Lehman fell later in the year of 2008. But initial jobless claims would have told you by the middle of 2007 that there was something to worry about. So I love that indicator. We spoke about this a bit earlier, looking at the treasury spread between the 10 year and 3 month, because if that number starts to go towards zero, people think that shorter run, the world looks more risky. And so you want to stay away from that zero mark. We are trending down, but nowhere near the point of zero. And we've trended down before and it goes back up. So I like this indicator because it's daily so you can get a quick up to date of what's going on in the bond market. And then lastly, purchase applications. So going back to housing, the census puts out their data that gets all the headlines of new home sales. But that data often comes with a margin of error of plus or minus 10%. Plus if you look at it right now, we don't even have September's data yet. So when that comes out, I anticipate it will be down because of the hurricanes. Purchase applications come out weekly and those have already taken into consideration the hurricanes and they've moved on and they're up 4% year over year. Do you have other ones you look at?

Yeah, oh yeah, well, look at everything, of course. But yeah, but, but you know, the statistics can be so, you know, you really gotta tease them out. And it's of course, this is why nobody can really predict any of this stuff, right? I mean, because you have, you know, you have universities full of experts and institutions full of experts. And even the Federal Reserve that arguably has the best information on planet Earth, can't figure out the cycles or how to fix them unless they're intentionally causing them. And that's a whole other discussion. But you know, kind of give us, I want to make sure we spend some time talking about the millennial generation, maybe a little bit on Gen Z that comes after the millennials because, you know, it's kind of time to start looking at and talking about that one. And then also just what are some of the trends in housing? But kind of sum. Some of this up for us, if you would, Ali, by just saying, what do you think? Like, where are we going? You know, how are things going? Just sort of in a general concept. What's the vibe, if you will? How's that for a scientific study?

Ooh, yeah. So the vibe I get is a lot more cautious because of affordability. But when I look at demographics now, I am a millennial, so that puts me somewhere between 17 and 37. I look at those stats for millennials and the demographic trends give me so much peace of mind. I have spent the past few years digging into every piece of millennial data you can imagine. And I surveyed millennials and said, hey, guys, how likely are you to buy a home in the next one to three years? Now, across all age groups, that was 30%. But for millennials 27 and older, that goes up to 40% of them want to own a home in the next one one to three years. If you look at the curve, millennials right now, the highest percent of them are between 25 and 26 years old. This is telling me there are going to be a lot of young people that are going to go through that catalyst to buy a home. They're going to get married, maybe they're going to have kids, maybe they're going to move for their career. And once they start to get to that higher age, which is what we're seeing, they're going to be the ones that are going to be out stimulating the economy. And going back to what I said about the trickle down effect, that to me just says things are going to be okay for a while. Even putting aside the business cycle that we've been talking about, one of the.

Things that I think in every conversation like this, the elephant in the room, if you will, Ali, is that we're only talking about really number of home sales and home pricing. And it's just funny how that's sort of taken for granted, if you will, that that's what we're talking about, right? We're not talking about which way rents are going, which way yields are going for rental property owners or anything like that. We're strictly talking about home sales and home prices. And it's funny how everybody takes for granted that prices going up is good and prices leveling off or even declining is bad. You know, if, if you're a seller or a buyer, I mean, obviously you're on opposite ends of that exchange, right? So. So it's just kind of interesting. But one of the arguments that I have is that prices and rents are actually Non correlating indicators. So when the market softens, if you will, and we see prices soften and there's less incentive to buy because most people buy out of the scarcity fear, right, that, you know, if we don't get in the market now, we're going to lose out. We're never going to be able to buy a home if we don't get in now because prices are rising so quickly. And so that causes people to buy. But when that cycle changes, more people rent and we actually see rents strengthen. So it's, it's, it's kind of interesting how that works. But also, as I always say, the demographics coming at the housing market over the next decade are just nothing short of phenomenal. Your generation, Ali. I'm a Gen Xer, you know, but your generation, the millennial generation, is the largest demographic cohort in American history, just slightly larger than the baby boomers, and they're going to change everything. And, you know, it begs the question, with the student loan burden on that generation and in that generation's love for the sharing economy and for portability and being able to move to where the jobs are and so forth, are they as.

And also the fact that they, a lot of them saw their parents get burned in the economy and the Great Recession in the housing market, then are they as motivated to buy homes as prior generations? Do you think there's any shift in their mentality?

So I have so many things to cover what you just said. Let's start with.

I know we could talk for hours.

Let's start with the rents. So what I'm seeing with rents is right now, rents keep going up, at least for those kind of class A, really nice apartments. And I'm seeing that. And keep in mind, a lot of people talk about millennials in terms of their frame of reference. So in terms of, oh, well, my friends or my kids or, you know, people I went to school with. But what we're seeing is because rents keep going up, that's helping to push millennials out of renting to go into the homeownership rate. I'm sorry to go into homeownership, but what I found really interesting is I've been presenting about this guy that I've studied, and he bought a house in Denver, and he bought it because there was a second entrance, and that second entrance he was using as his investment property that he then could rent out. And he didn't have a mortgage because this other person paid basically his mortgage by renting it. And when I present that What I see is all of these young, and it's typically men, but all of these young millennials start to light up and they're like, well, that would completely change the game for me if I had a second entrance. And we're seeing, in the new home market, we're seeing seeing different builders starting to incorporate that either as an in law suite, but more specifically, they're saying, hey, you could rent this out and this house. And the affordability problem is no longer as big of a concern as it was when you were just looking at it straight from a monthly payment without also having an income. But to your question about student debt, what I'm seeing too is 45% of millennials said that they have not delayed life events because of student debt. So you could be glass half empty and say that the other way. But I'm seeing that student debt is creating compromises, but isn't necessarily stopping people from buying homes again.

So in other words. That's a great point, Ally. So in other words, they're buying less home or further out and maybe not in the ideal location. So those are the compromises. Right? They still want to buy, they're still actually able to buy. It sounds like what you're saying. They're just not buying as much as they otherwise would.

That's exactly it. And when you look at the stats. So you asked about a mentality shift, and I kind of went off on my own thing. But with the mentality shift, what we're seeing is, so millennials are the most educated generation ever. And when you have a college education, the studies show that you're more likely to want to. To own. Because I think the mindset and understanding the financial benefit of owning versus paying off someone else's asset in some millennials minds makes sense. Now, that's not to say there aren't ones that want to lifestyle sample and live in these beautifully extravagant apartment complexes that it's really hard to get them out to homeownership rate. But I think that's a select group of millennials. And then you have your other group that says, I want to own. I just got to figure out a way to make it work.

Yeah, very interesting. Okay, what are some of the choices they're making? You know, in talking about housing types and, and, you know, are builders really changing the way they design homes and kind of the amenities and features they offer now? Of course, you know, the smart home is a big change. Are homes getting smaller, for example?

You know, when you look at different product types, what I'M seeing is maybe the home itself isn't getting smaller, but the ones that millennials are going to, the condos and the townhomes they want to own single family detached. Across the board. You can survey pretty much any market you're in. And everyone says, I want a single family detached home that's 3,000 square feet. But you and I spoke about how I grew up in Cleveland. In Cleveland, maybe you can get that if you're on the higher income spectrum. But we're seeing more of the millennials are shifting towards what they can afford. So if that's a condo and the condo is maybe 1200 square feet. Again, I've surveyed millennials. What I'm seeing is they buy between about $1,200 and $1,500 for their first home. Of course, I had outliers. I had people that owned 4,000 square foot homes. So you're always going to see the difference. One thing that I think is really critical is you were asking about what builders are building.

They need to be really careful builders about providing amenities that compete with the apartment market, because those amenities come with an hoa. So when you're dealing with a cost sensitive group of people that are already making compromises, like you said, in terms of maybe location or terms of size, if you offer them all these luxuries, but then their HOA is now 300amonth, that probably shifts the equation where maybe they need to rent because they no longer can afford because of the extra expense. Expense.

Right, right. And one of the things that, you know, it just bugs the heck out of me that it's always cited the square footage of the home in a way to say that, well, life is getting better, people are getting richer, they have more. Because the average square footage of the home for post World war baby boomers, their first home was, you know, 900 or a thousand square feet, and now it's 2200. But what they don't tell you is that the, the density is radically different. You know, that that post World War II Baby Boomer Home in Lakewood, California, you know, on a quarter acre lot, you know, maybe the house was small, but yet a huge yard, you know, in a very conventional neighborhood, is now a, a cluster home, even if it's detached technically, is still really tight. Isn't that misleading, though? Ali doesn't. You know, this is why you really have to look at this stuff and tease out the reality of the situation, don't you?

Oh, of course. Yeah. And when you look at the stats too, you Know the headlines goes back to, oh, millennials and urban and all of this. But when I spoke to millennials, did my survey, 45% of them live 11 to 30 minutes from work. So that's not urban, that's not downtown. They're equally as likely to live one to ten minutes from work as they are to live more than 30 minutes from work. So we're seeing that that kind of 11 to 30 minutes from work is the sweet spot, which doesn't need to be right downtown.

Right. And you know, the interesting thing about that is I think that's going to change as well. And I'd be curious as to your thoughts on autonomous vehicles, the self driving car. I think that's a bit of a game changer. I mean, who knows exactly when it's going to come, but it's certainly coming. The primary value drivers for real estate since the beginning of time have been what? Location, location and location. Right. As everyone likes to say. But I think there's going to be some downward pressure on that concept as transportation becomes simpler and less burdensome.

Well, I love talking about this because since it does seem so abstract right now, everyone has their own take on it.

If you asked me, I would not live further away because I can sit in my car and still work. I would still want to be close to a downtown or close to my employment center, just for ease of life. Even though you do have the autonomous car, the biggest question that I'm hearing is, well, where the heck do these things park? You're gonna have so many cars and.

They don't need to park. They can just keep moving.

They just keep moving. Okay, well, maybe if they're an on.

Demand self driving car, you know, a sharing economy concept. Right. Where, you know, you just summon the car and I mean, the car doesn't need to rest, it just needs to refuel is all. But, but if it's your own car, then it needs to park, obviously, right?

Yeah. And I struggle with this too, because, Jason, it sounds like you travel as much as I do. And I used to love Uber when I was like, oh, we're going to go out to dinner, we'll Uber to dinner. But when you travel, I find Uber is a painful experience. I find getting off the airport and waiting 10 minutes for my car, and maybe that's the millennial in me. But I, I wouldn't want to change my lifestyle because I like having my car right there, not having to wait for someone else to or for the car to show up. If it was an on Demand self driving car.

Yeah. And you know, that sort of. Sometimes I feel the same way, you know, rather than calling Lyft or Uber, you know, sometimes I'm looking and I'd see, well, there's a bunch of taxis right there. I can just get in the car rather than wait.

Exactly.

Find the person. But you know, I think that's going to ultimately get a little easier. And you know, the technology just keeps getting better and the availability keeps getting better. But you know, you, you say, well sure, you'd like to still be the same distance or close to your work, for example, but the question is at what price? Ally, there's always a trade off. Like if you get an extra 500 square feet or you get a larger yard or a lower price home that's more affordable, you're going to make trade offs. Everybody will. The old saying in real estate is. Is what? Drive until you qualify. Right, Drive until you qualify. And so you know, you live in Orange County. My former home. And we know certainly a lot of Orange county people live where in Riverside. I mean they work in Orange county, live in Riverside. Right. And so it's the drive until you qualify concept. Or they live in Corona, which is kind of the. Right at the outskirts of Riverside. So I mean that, that still has play. I'm just saying that my argument is that the transportation issue will become less burdensome. I'm not saying it's going away by any means. It's still there, but I just think it's less of an issue.

Your comment on disruption too. So if you look away from self driving cars and start looking at an increased reliance on prefab housing, or there's Entecra, if you've heard of that company, the fully integrated off site solutions. If you start to look at different affordability solutions, while often prefab doesn't give you a cheaper product, we are seeing that the time savings ultimately passes on a lower priced home for the buyer. So I know Integra has been really successful in Europe and they've come here and they want to take off and there are no design restrictions. You don't picture a modular home. You picture that gorgeous home that you designed yourself that they can all do in a factory and reduce the time it takes to build the home.

It's, you know, that's rather surprising to me that we haven't really seen, well, at least in my eyes, more in the manufactured housing world. You know, there's still this kind of like style stigma against it. And now what you see is a Lot of the. The components are being put together in a factory and then just assembled at the work site. And then of course, Ali, there's all this talk about 3D printed homes, which so far we're not really seeing any. Anything there, but maybe we will. It should make it less expensive or it should make the homes nicer, one or the other. You know, that seems to be a relatively slow development. Am I wrong about that?

This company that I've mentioned, Entecra, has kind of come in and last I heard, seven of the top 15 builders have reached out to the CEO and said, I'm serious about this. Let's talk solutions. Because they're different than what's already in place. Now, I should say I have no investment, no money involved in Entecra. I've just learned about them and I'm like, wow, they are going to change the world because their design and engineering focus and a lot of the prefab, you know, different builders here in the US have kind of dabbled in it, but they haven't done it successfully because this company can take the blueprints from an architect, feed it into the system and spit out that house. That's not what we used to have here in the US that's not what our existing prefab looks like. And this person, this company can do it mainstream. I think it will come a lot quicker than we think. Now that this company that has 30 years of experience in Europe doing it, I think they're going to change the industry quickly.

Really? Wow. Interesting. So, I mean, are any of the large home builders using their system or do they strictly build for themselves or how does Integra work? I mean, are they, you know, outsourcing that stuff to other people or are there companies?

Yeah, so this is what I was confused about them is, as a consumer, you and I will never buy an Integra home. We will always still buy a KB home or a Lennar home, but Pulte or whatever. Yeah, exactly. Yeah, all of those. So it'll still be from the builders. We know and love this. I can't say who they're working with right now, but they are working with public builders and small privates as we speak to supply them homes.

Very interesting. Okay, so anything more on what kind of homes they're building or any, you know, different features that are popular nowadays?

Sure. So I think two things to keep in mind too is both you talked about the smart homes, and what we've noticed is a lot of builders have moved to make smart homes. Standard when you go to buy a new home. But a lot of the younger people are okay if you don't give them a smart home, because we grew up with the Internet and with technology and, you know, we like to laugh about the different personality traits of millennials, but often they think they can do it better or maybe they want it to be under certain. They don't want it under Google. They want it under a different system. I don't think focusing that much on tech is where all the money is at. Same with energy efficiency. So Molly Carmichael works for us. She's our principal and she does consumer research. And while millennials, the number one thing they really want to put energy efficient, they want an energy efficient home, but back to payment, they're not willing to pay for it. So I think that's another thing that's a bit you hear millennials, I know they're environmentally aware, but they don't have the money to pay for it yet. So I think those are two interesting things that are a bit different than what you would normally think.

Yeah, very interesting. Ali, what questions haven't I asked you? Or just is there anything you'd like our listeners to know before we wrap up?

So the remodeling data, to me, you know, we didn't talk about when does supply come onto the market? And probably because it's hard to answer that question. But when you look at remodeling data, even before the storms, what we see is places like Home Depot and Lowe's are taking off. And let's say in theory, that's because people, when you look at the remodeling index, people are remodeling their homes. But the question is, are people remodeling because they want to, to stay put, or people remodeling because they see their home is worth more money and they want to put it on the market? So I think spring selling season will be incredibly fascinating to watch for 2018. When you look at sales, Zonda, that you talked about earlier, our product has 16,000 actively selling projects. And we're seeing, of course, sales are slower than the spring selling season, but they're still up 10% compared to this time last year. So I'm seeing pretty positive trends, and I may come off a bit bearish at times, but I think at this part of the cycle, people should look at data with kind of a bearish lens and then look for, you know, we talked a lot today about discerning the data and kind of finding what makes sense. And is that trend related to Something else. So I think just paying attention to the data more acutely is, is very important at this point of the cycle.

Yeah, fantastic. And what type of. So you're saying that inventory is a little higher than it was in the crazy spring selling season now, is that correct?

Oh no, sorry. Sales are not inventory.

Sales. Sales not. Well, how is inventory doing by the way? I, you know, if you ask me or anyone I know they say there's just no inventory, there's nothing to buy. But you know, that's sort of a generic concept and those are lower end rental properties. When I talk to people, I mean in the higher end it changes quite a bit. But what are your thoughts on inventory?

You guys are exactly on point when you look at the different MSAs across the country. I have a graph that shows where it was this year, where it was last year and almost every single market. And even last year we were talking about how tight supply was. It's even lower this year. So yes, you're right. Six months of supply for existing is typically the equilibrium level on my graph. I don't even have to make the Y axis go up to, to 6 because we have none of the top markets that have that much supply available.

It's existing resale home inventory.

Right, exactly.

Okay. And, and so, so six months is the sort of the, the tilt. Right. The equilibrium point for resale homes. What about for new homes? Do you have a metric for that too, Ally?

You know, I don't. We, we track it in our app, but I don't have the number off the top of my head.

Yeah, but I'm just wondering, do you have one that you sort of look at and you say, well if there are three months of new home inventory, then there's a decent amount of supply or I'm not asking what the inventory is, just if you have a thought on that.

Well, this one's really hard because even if the number says that there's five months of supply, what we're seeing right now is builders are not able to provide that attainable product. So even if you look at it and you say, oh well, it's not worrisome, but if all they're building is luxury product, the number is going to be skewed. So I don't typically look at that. Yeah, right, right.

Go ahead.

Sorry. I look at the distribution of supply across price range, which is completely metro specific, but that to me gives a better picture of, geez, they only have 5% of their products under 300,000. I like to look at that better?

Yeah, I totally agree with you, by the way, because these, you know, what people have to realize and what drives me absolutely nuts, I'm sure it drives.

You crazy too, is when you hear.

People in the mainstream media talk about the housing market. You know, I mean, look, how can you do that in a country as large and diverse as the U.S. you know, price segment, home, you know, product type segment, whether it's, you know, single family or townhomes or whatever, or condos. You know, the high rise condo market is very different than the single family home market. You know, what metro, what geography, what price range. I mean, there's so many ways you have to peel back the layers of the onion to understand what's going on. And, and that's why people like you have careers.

Well, I'm thankful for it.

Yeah, we're glad that you do. This is, this is much more complicated than it looks on the surface. Sometimes give out your website or a Twitter handle or anything you'd like people to have. Ali.

Yeah, so we're@myersllc.com I'll be on the Contact Us page. We write awesome blogs and newsletters that we send out, so subscribe for those. We've covered everything from bubble markets to Amazon to the Fed and interest rates. So look us up. We do a lot of cool research.

Yeah, good stuff. Yeah, you certainly do. And Ali, one other question for you. Do you think builders are building to the right segment of the market? I know this is a loaded question, but I just meant to ask you earlier. I mean, are they building the type of product type that's needed? To me, it appears that they're not building enough entry level type housing. It feels like there's just a giant shortage in that and I'm not sure why that is. Maybe it's just so much more profitable. Build higher end homes.

Builders are building what they can pencil. They cannot buy the land at a price that it makes sense. And so some. I just met with an architect and we talked density solutions. And so in some circumstances they can make a pretty dense community and still have the margins make sense, but that's harder to come by. They want to. They know that there is a void in the market. They do. But when we're at land prices that we saw during the last cycle, it's very difficult to provide.

In other words, they can't buy the land cheap enough to make the product. That means. What does that mean, folks? It means prices are going up. So, yeah, good stuff. Ali Wolf, thank you so much for joining us today. Say hi to my old buddy Jeff, the founder of your company, and keep up the good work. Yes, we'll do.

Thanks, Jason.

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