CW 437: Real Estate Investment Trends in America with David Crowe Chief Economist at the National Association of Home Builders (NAHB)

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Welcome to the Creating wealth show. This is your host, Jason Hartman. This is episode number 437. Thank you for joining me for episode 437 today. I apologize if you hear a little bit of background noise. This intro will be relatively short because today our guest is David Crowe, who is chief economist and senior vice president at the national association of Home Builders, otherwise known in the industry as the nahb. He'll be here to talk to us about the different regions around the country that are doing well and how they are faring against other regions in the country in terms of home builders and home builders expectations and the economy in general and credit conditions, mortgage conditions and so forth. So we'll have David Crow here with us in just a moment. I am in Puerto Vallarta, Mexico, as I was on the last episode. I'm on my way back today, just here, about to catch a plane, but wanted to record a quick intro for you. I've been at a personal growth seminar this week and it's been quite interesting and educational. If you're listening to this show, I'm sure you do the same thing and that is constantly have your head, your mind engaged in the concept of growth. Constantly be engaged in growth, constantly be learning, constantly be growing, making sure that you are never stagnant. You know Ray Kroc, the founder of the McDonald's franchise, not the founder of McDonald's, that was the McDonald brothers, but the McDonald's franchise. He had this great quote that I heard when I was 17 years old. He loves this quote and he would say, as long as you're green, you're growing. As soon as you're ripe, you start to rot. And that is a guiding principle in my life. It should be a guiding principle in everybody's life. It probably is in your life already. So I'm sure I'm preaching to the choir here because you are obviously seeking out growth and education by just listening to this podcast. And I appreciate you listening. A few of the things I learned this week, I just thought I'd share with you before we get to some hardcore economics and real estate topics. They are. I heard Chris Gillebo speak, and he'll probably be on one of our 10th episode shows in the future. And he's got a book entitled the Happiness of Pursuit. This guy is pretty amazing because he visited every country on Earth. Now, I thought, I've done a lot of traveling. I've been to 74 countries. He's been to 193 countries. And I guess every country on Earth is a little bit debatable. He said a few things that were really neat as he profiled these different people he met while traveling around the world and visiting every country before, I believe, before the age of 35. And a couple of the principles he talked about was you have to believe in your dream, even if no one else does. And he also said that unhappiness, or what he calls discontent, is a great motivator for creating change. One of the last points he made, which I think was one of the best ones, he said that we're all conscious of this concept that we will not live forever, right? We all know we will all die at some point. It's not like we should walk around thinking about this all the time. But there is an importance to being aware of this, our mortality, because he said that being aware of the end of our lives can help us with the rest of our lives. That's a good quote. Let me say that again. Being aware of the end of our lives can help us with the rest of our lives. And so it brings to the forefront, you know, some urgency, not just letting time go by doing something with our lives. And, you know, in the world of real estate investing, I've certainly seen that over the years. In fact, I've seen it with my own company. You know, I've certainly known many people that go to lots of seminars, read all the right books. Heck, they go to my seminars, they listen to my podcast. And I appreciate you coming to my seminars and listening to my podcast and reading my blog and so forth. But when it all comes down to it, you know, if we don't take action and we don't start investing, nothing happens. So really, having that presence of mind to be aware that time is passing and we've got to put it to productive, constructive, good use, we've got to start investing We've got to take whatever steps we want to take in our lives to do whatever we want to do. Another speaker, Gosh, there were so many speakers and I can't even remember them all. But another speaker was Tom Chi. And Tom Chi has been at the heart of leading different teams at Google and other companies, leading the team that developed the self driving car. Okay. You know, I've talked many times about how the self driving car is a disruptive concept in the world of real estate, because real estate has always been based on three cardinal rules. What are they? Of course, you know, location, location, location. But when you have a driverless car that can move you around, location becomes less important. Geography, as I always say, geography is less meaningful than it's ever been in human history. It's still meaningful for sure, but it's just less meaningful than it's ever been in human history. Tom Chi was fascinating. He also led the team that developed Google Glass. He talked about how the first prototype for Google Glass, literally, I kid you not, was made of chopsticks. Chopsticks. And so, you know, we'll see what happens with Google Glass and how that changes the world of wearable computing. And if it does, you know, certainly a very innovative company, obviously. And he talked about also the concept of nouns and verbs. And I can't exactly remember this right now, so maybe I'll probably have Tom on a future show to talk to you about this. But he talks about how a noun is a way to stop thinking about something. And so as soon as we think we know everything, right, then we basically are using that as a shortcut to stop learning. And so, you know, we do this, obviously this is a form of efficiency. You know, we stereotype things. It's just human nature to do this. And it's not all bad. Certainly we need to take shortcuts in our thinking, but sometimes those shortcuts really do limit us. So that's what he talked about. Gosh. Going through my notes here, another speaker. Good quote here. Awareness is the master discipline. Awareness is the master discipline. Also, the paths to fulfillment. The paths to fulfillment are giving gratitude and growth. Okay. Oh, here's, here's a good one too, you know, because we all get sidetracked sometimes and we worry about what everybody else is thinking about us. I like this quote. What other people think of you is none of your business. That was a good one. So anyway, it's been just a great week down here. I've certainly learned a lot and I'll continue to share this stuff with you and have some of these speakers on the show in the future because remember, every 10th episode we go off topic, we talk about general life success, not just real estate investing, not just economics, not just personal finance stuff, but general life success stuff as well. But on this episode we're not doing that. We're talking about hardcore stuff and let's talk about the housing market. But before we do that, this importance of growth. Right. We just posted and I just mentioned on our last episode how our Meet the Masters event for January is now confirmed and a few of you already registered. Boy, that was quick. So thank you for doing that and we look forward to having you join us in January at Hotel Irvine. We've got some great early bird pricing, so go to jasonhartman.com Register for Meet the Masters Also if you can join us in I think it's just 11 days away for our Birmingham Creating wealth seminar and Property tour. That's another great opportunity for you. So we hope to see you at both of these things Birmingham coming up just real shortly here and then Meet the Masters in January and we'll be talking more about that event as well. So let's get to David Crowe, chief economist and senior vice president at the NAHB national association of Home Builders. Here he is.

It's my pleasure to welcome David Crow to the show. He is the chief economist and senior vice president at the national association of Home Builders A, otherwise known as the nahb. They do some great work and research on different things that affect home buying patterns, the economics of that around the country. David, welcome. How are you?

Thank you. Jason, thanks very much for inviting me. I am just fine, thank you.

Where are you located? I'm getting the feeling, although I don't actually know this, that you might be.

In Washington D.C. yes, that's right.

NEHB headquarters are in Washington D.C. because we do a lot of work with the federal government, both the Congress as well as the regulatory agencies.

Yeah, absolutely. Well, what is happening? Maybe that's a good place to start to talk about regulatory environments. And there's been so much going on since the financial crisis in terms of regulations on lending. Dodd Frank, fha Will Fannie Mae stay open for business? It's like there is we could talk for days, I'm sure. Pick it up where you like and what you're seeing and what you're working on.

Well, it is a big part of the housing recovery. The frankly my opinion the over regulation of the mortgage market has kept people out of the market and has kept them from buying homes clearly something had to be done. There were some excesses in the mid 2000s that needed correction. But I think unfortunately policymakers swung the pendulum too far the other way. So we have a lot of, not only new regulations but a lot of uncertainty, a lot of things that aren't quite clear, regulations that haven't been written yet. As you mentioned, we don't really know what's going to ultimately happen to Fannie Mae and Freddie Mac. And that leaves mortgage originators up in the air as to exactly how their business will unfold, what kind of mortgages they can expect to be able to sell if they were to make them. And so those conditions have led to very tight lending standards and have particularly affected the first time homebuyer.

My impression is that Post Financial, you know, of course before the crisis the banks were just being stupid. It was the fogamir get a loan program. And afterwards it really felt like they overcorrected, especially in terms of investors. You know, I think banks have been really, really way too conservative when it comes to qualified investors with good credit, you know, who can't buy properties. And you know, a lot of them want to invest in new homes. Although that's not a huge part of new home developers business, I'm sure. You know, it's a percentage, it's a decent part. What are you seeing in that pendulum that swings back and forth nowadays?

Well, I will say that I think I've seen a little bit of light both from lenders who are sorting out where the boundary lines are, where the regulatory constraints are. And you know, we've noticed in the last couple of weeks the fhfa, which is the regulator of Fannie and Freddie, have tried to make some concessions. They've allowed Fannie and Freddie to make loans up to 97.

Instead of 95%. And more importantly, they're clarifying the conditions that would allow the FHFA to return the mortgages, to allow Fannie and Freddie to return the mortgages to the originator. That's been a big cause of concern is that originators have done their due diligence but because there's some mistake in there that may not have any consequence but nevertheless it's a reason for, for Fannie and Freddie to put back the mortgage. And that's caused a lot of again, confusion and extra tightness because they don't want, the lender doesn't want to end up with those mortgages. We also gotten, as you say, and I agree, overreaction to what happened. And people who don't have Regular incomes who don't get W2s are caught in a buy. So they have decent incomes, but they aren't necessarily verifiable by these routine income statement.

They've been cast into a kind of a never never land and unable to get a mortgage. You know, the classic example was a few weeks ago when we discovered that the former chairman of the Federal Reserve was turned down. And although there was a lot of hypothesis as to what it was, it is in fact the case that now that he doesn't have a regular job, he doesn't get a W2 anymore.

Right, yeah, makes sense. But that's just such an odd story. You know, Obama's credit card was declined recently too. It was in the news. It's kind of funny, you know, where are we going? I mean, share some of the stats on new home sales, if you would, and tell us how the developers are doing nowadays.

Well, we were going at a decent rate. The recovery was slow, but nevertheless, it was moving forward. I will have to say that 2014 has put kind of a pause in that forward movement. We're going to do better in 2014 than we did in 2013. So we still are going forward. We're probably going to sell, for instance, about 440,000 new homes in 2014, but that's only a small improvement over 2013. The year really started in a chilly sense, literally as well as figuratively, and we never really made up for that. But a lot of the uncertainty behind that marketplace are beginning to disappear. Values are going up so people have equity in their homes that they could turn over. As I mentioned, while constraints are still tight, they do seem to be moving in the right direction of allowing a few more people into the portals. And the most important change has been a much better employment market. We are adding significant jobs every month to people working in this country. So that will help, I think, move us forward at a faster pace next year.

What are you seeing in terms of the supply, demand ratios in terms of, you know, new home starts, new versus the demand last time around and, you know, I'm speaking, of course, up until, you know, 2006 or so, we saw this oversupply. Because the other thing we have to discuss and consider is the financing availability for builders, for home builders, you know, how much can they build? And is that, is that commensurate with demand from buyers?

Yeah, so that has been a struggle. Mostly the builders are building to demand and demand just hasn't completely come back. As I mentioned, first of all, the first time homebuyer isn't participating in nearly the pace they usually do. So that's pulled away from the potential sales. And the repeat buyer, at least in some cases, still doesn't have enough equity to move forward because the prices haven't come back. Or even in a few cases, they're underwater, so they don't have any equity. And then there are those current homeowners who refinance because they actually did have equity and did have a solid job, but they now have a very low mortgage rate, and so they're not quite as anxious to turn that over. So that pulls a lot of potential home buyers out of the market as well. So we are moving forward, adding both of those types of buyers back into the potential buyer market, but at a slow pace. So in some ways it's fortunate because the builders have been faced with supply constraints. Credit is one of them. So most builders, particularly small builders, borrow from community banks. And many of those community banks, either because the regulators told them or because of their own business policies, have been a little reluctant to get back into the residential construction in lending markets. So builders have had trouble getting credit. They are having trouble getting lots to build their houses on because a developer that would normally bring that lot to a market wasn't doing it several years ago. And that's a long pipeline of preparing land, of getting approvals, and putting in the infrastructure. And so several years ago, when that wasn't taking place, we're now feeling the effects of a shortage in land lots and labor as well. So builders are having trouble finding labor because many of the construction workers found other jobs. They had to survive, they had to get some means of earning income, so they went to a different industry. And so putting this band back together again has taken some time. And in a way, it's been well coordinated with the slower return in demand. So there's been kind of an evening of both difficulty in bringing supply back in as well as bringing buyers back in. We think both of those are resolving themselves at a reasonable pace. Demand in particular, because of the strong employment market. And that is bringing out new supply, bringing out building material manufacturers who are putting up plants, bringing labor back out of idleness, or from other industries back into home building. So they're struggles, they're headwinds. But we are gradually resolving each one sort of one at a time.

Tell us, David, if you would, about the NAHB membership profile. I mean, when you look at what builders are doing around the country, is it mostly large corporate builders or is it, you know, some of these smaller builders Too, you know, what is the membership makeup like?

NHB's membership is dominantly the small, private.

Single, entrepreneur, builder. We certainly include every kind of builder in our membership. So the very large national companies, publicly held companies, are part of our membership, part of our association. But the bulk of our members and the bulk of housing production is the small independent single market, often passed down from parents, so that the company has been in the family for one, two or more generations. And they build a fair amount of custom houses. That doesn't necessarily mean very elaborate houses. There's a lot of home building that are modest homes, but they're built directly for the individual, built sometimes on their own land or built on land purchased specifically for that one house for that person. So it's a very small company kind of industry.

Yeah.

Oh, really? That's surprising. How many members do you have?

We have about 140,000 members right now. That includes not only home builders, but also all the companies that supply the industry.

And there are so many of those. Tell us about them.

Yeah, that's right. I mean, that's, in fact, makes up the. Actually, the larger share of our membership are the subcontractors, the drywall companies, the lumber and the retail companies that sell materials, like lumber companies, plumbing companies, mortgage companies, because they lend to the buyers for new homes.

It includes architects, people that design houses. So it's a really wide range of all the things, manufacturers of appliances, carpets, all the things that go into homes as well. So it's a very broad range industry. In fact, it's why the industry has such a broad economic impact, because there are so many industries involved in producing products for houses, building houses, designing houses, selling houses, financing houses.

And that is why real estate is the holy grail of the U.S. economy and economic growth. Because like you said, it's that there are just so many industries impacted when home building slows or when it gains steam. And that's why it's just so important to government and economists.

Right?

Yeah, no, that's exactly right. It's. I feel like I'm in the perfect spot of seeing so many different activities go on when housing goes up and unfortunately, when housing goes down as well.

Yeah, yeah, absolutely. I'm not sure how much you deal with this, but, you know, maybe you just have a brief comment on it, even about technology in the new home business. For years we've heard about the smart home, and that seems to have come very slowly. You know, we've got Nest, the thermostat. You know, that's sort of a Big deal. Maybe semi big deal. But you know, what about building houses with 3D printers and large scale 3D printed houses and the modular movement and all of these new technologies in construction and just living. Any thoughts on that?

Well, you know, it's a interesting idea and I certainly wouldn't, since things have changed so much over the last couple of decades. You'd be very hesitant to cast out really radical ideas today. Because actually radical ideas today become reality in a year or two or a decade at least. So I don't know if we'll ever get to 3D printers making a house on site, but I wouldn't eliminate it.

As not a possibility. We are introducing more technology in building more pieces of the house in a factory. So maybe not the full scale modular model where a good deal of the house comes out on the bed of a truck and is more or less prepared. That's only a small percentage of our market. But more of the components, the staircases, the windows, in some cases wall sectors, those sorts of things used to be built on site and now they're not. They're built in controlled factory settings and moved to the site. The high tech component of the home building industry has gone more into the appliances, where we have much more efficient appliances, into wireless Capab, so wireless safety devices, wireless.

Protections, wireless control of video and audio components throughout the house. So that's a big new element of home building, is to be able to build in more of the modern technology directly into the house and certainly ways to save energy. So that's also been a big change, so that new houses are much more energy efficient than older houses and yet the equipment isn't that much more expensive. It's just that technology has changed.

What else can you tell us about the economy and what's going on with home building? I just kind of want to leave it open to you as we go toward wrapping up here as to just anything you want to talk about, any interesting articles you've been working on or studies that you've been doing.

Well, it's been a challenging time for economists to try to figure out what's going to happen. We went through the worst possible housing downturn that we've all seen in our lifetime. The only one we can compare it to is the Great depression of the 1930s.

And so everything's kind of a new learning experience in terms of exactly what will it take to get the housing market back together? What will it take to get the whole economy back together?

So we're getting a little better. We collectively economists Looking a little more detail at what actually has moved the market so far, what have been the problems with it, what's been slowing it down. And it really does look like it's a consumer confidence.

Consumers lost ground in their home equity, lost ground in their stock equity. They lost their jobs in many cases, or not lost a job at least had a cutback in their incomes. And so that really has shaken fundamentally the consumer. And it's taken a while for them to regain that confidence. That's what we are going through now. So we're seeing some movement forward. We just had a nice strong report of the third quarter of GDP, a very positive second quarter GDP. We've had over 200,000 job additions each month for most of 2014. Not every month, but most of it. So all of those things add together to an expectation for some decent recovery in 2015. Moving aside most of those clouds over the consumer's head.

And certainly clouds that would make you think twice about buying something as expensive is a significant portion of your income as a house. So we are feeling comfortable that that's moving forward. The thing that's biggest hindrance to this recovery now is the first time home buyer. So the repeat buyer is starting to get new additional equity, feeling comfortable, they'll come forward at their pace. But the first time buyer is really up against a lot of headwinds. They're young people, 25 to 34 years old.

They had the unfortunate happen chance of being entering the job market exactly at the wrong time in this cycle. So they had to struggle.

They've got massive student debts.

They have student debts, although the thing about student debts is that's a debt against a human capital investment.

So they are capable of earning more money than someone who didn't go to college. Now of course someone that went to college and doesn't have student debt is sort of has a double advantage. But.

What'S missed in that student debt conversation is if they got an education, if they completed their education, they have something for that debt and it might take them a while to get it out of it. So they're not immediately going to see the benefit of that. But eventually that will allow them to earn more money than they otherwise would have, allow them to pay off the debt and allow them to become a homeowner. It's just going to be delayed. But that is a problem is that we have delayed first time home buying from all of these headwinds, from poor employment, from student debt and from the employment that they have gotten has not necessarily been at the same pace as prior generations. So we don't have them participating. And they're a double whammy on the marketplace. Not only do they have they not been purchasing new homes, although they're more likely to start with an existing home. But when a first time buyer buys an existing home, many of those sellers buy a new home. And so we. So the first time home buyer has. Yeah, the fall away of the first time home buyer has affected the new home market in, in two ways, directly and indirectly. And again, it's another one of those elements behind this slower than expected recovery because we don't have those young people participating.

Yeah, no question about it. And you know, what do you think when you see, and I'm sure you've seen them, because I know I have the articles, David, about how the millennial generation or Gen Y doesn't really care that much about homeownership. They're pessimistic. They don't really believe in the American dream or just that. They just like mobility. I mean, frankly, look at, I'm in real estate, okay, So I want people to buy homes. But mobility, I always say, is one of the best things you can have on a resume. Don't be able to move to where the jobs are.

It is.

And I believe that beyond the financial constraints of not being able to get a mortgage and having student debt and having lower payment jobs and not having enough savings, which, which will all kind of cure themselves over a lifetime. But this idea that you have to move for your job, and that is much more likely, the younger generation is going to have many more jobs than my generation had, and some of those are going to require them to move. So, yes, there is an additional social reason why we've seen virtually all of young people moving into apartments rather than into into owned homes. But that too, if careers run the same pace as they have in the past, they do eventually settle down. They do eventually get jobs that don't require movements as frequently. I think the postponement of marriage and children has as much to do with.

Young people's preference for renting right now as anything. There's a strong correlation between time of marriage and time of children and homeownership.

Yeah, no question about it.

So if the clock keeps ticking, I think that may be the actual trigger for young people to suddenly show a stronger preference for homeownership. And the other thing that will.

Make them consider again about homeownership is rents are going to continue to rise and at some point, young people will turn around and look at each other and say, hmm, you know, for this rent payment, I could be making a mortgage payment and accumulating equity. So that too will be a driver. So I don't think this is a.

Monumental change that's shifting the preferences for homeownership. I think this is a postponement of everything. Postponement of jobs, of marriage, of kids, of home ownership. But it's a postponement, not, not an elimination.

Yeah, yeah, good points. Well, David Crow, thank you so much for joining us today. Give out your website if you would, and tell people where they can find out more about your work.

Www.nahb.org Fantastic.

Nahb.org National association of Home Builders. David, we appreciate you joining us today.

Thank you very much, Jason. Good to be with you.

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This show is produced by The Hartman Media Co. All rights reserved. For distribution or publication rights and media interviews, please visit www.hartmanmedia.com or email mediaartmanmedia.com Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax, legal, real estate or business professional for individualized advice. Opinions of guests are their own and the host is acting on behalf of Platinum Properties Investor Network, Inc. Exclusively.