CW 535 - Pay Close Attention to The Millennial Demographic with Mark Fleming - Chief Economist at First American

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Welcome, welcome, welcome to the Creating wealth show. Thank you so much for joining me today. This is your host, Jason Hartman. This is episode number 53035 and today our guest will be Mark Fleming. He is the chief economist with First American and First American. You know, when I say that to you, I want to say First American title, but it's much more than a title company, really. A very large organization with all sorts of different branches and subsidiaries and so forth. And so he'll be joining us with some really interesting insight on the marketplace and just what's going on out there in general. I am not in the closet today recording. I'm in my living room which has still got way too much of an echo. So I have to try and remember to speak softly and not project my voice because it only makes the echo worse. But I am going to be doing some nice sound treatments to this room with marble floors and glass and hard surfaces to make it sound a lot better. So those are coming up probably by the next episode. When you hear me recording, I will have some nice soft sound absorbing stuff on the wall, which is what everybody wants when you're a recording guy. Hey, you know, I just came from a great coffee meeting with two of our wonderful clients, Derek and Richard and we just kind of impromptu were comparing the San Diego market, which is of course a very cyclical market and a non cash flow oriented market, we were comparing that to some of the linear markets and in doing kind of this comparison on how investor would do over time in these different markets and I wanted to share this with you. I actually Richard and Derek, I'm sure you're going to be hearing this podcast. And so what I did is I took what we were doing And I actually expanded it because one of the parts of our equation we forgot to include was the appreciation rate that would occur in the linear market and how that compares to, to the cyclical market. Now, Richard has made some good money on San Diego condos. He was a contrarian and he was smart to buy these knowingly cyclical condos that, you know, have a speculative, risky aspect to them. He had the courage to buy them at the really downtime in the marketplace where, you know, nobody was touching any real estate at all, really. Not too much. And of course, in the very cyclical markets that had been beaten up like crazy, as pretty much all of California, South Florida, the Northeast, any of the more expensive markets around the world were beat up very badly, he was buying, you know, condos, okay? And you know me, I don't like condos at all. I like single family homes, I like apartment buildings. But he made some great money doing this and he's thinking that, you know, that is not going to last forever. That is coming to an end. It is speculative, it is risky and it's management intensive because he was doing rehabs and reselling the properties. And there's a lot of work in that. It's a lot different than being a buy and hold investor, of course. But we were doing the comparison and you know, he's still fairly bullish on the California market, saying that even though prices have come up quite a bit here from the Great Recession, that there's still a few more years of appreciation left in the gas tank, if you will. Still still a few more years of appreciation left. That's his opinion. Now, of course, like anybody, he could be wrong. It's very, very hard to predict appreciation or depreciation. You've heard me say that before. I've never met anybody who, you know, there's lots of gurus out there. There's lots of people selling books and tapes and doing seminars. I've never met anybody who can reliably predict these cycles. But that said, let's assume that it is correct that the market will continue to appreciate in the cyclical markets like the Socialist Republic of California, my new home, over and over again. You know, I'm back as, you know, moved back from my four year stint in Arizona. You know, I'm, I really am beginning to like it here now that, you know, the weather is still kind of iffy June gloom, which is no fun, but I'm kind of liking it overall, I have to admit. Okay, so, but I'm a renter, okay? So I'm not, I'm not into this high price real estate. I'm just using it for its utility and enjoyment value, paying monthly and investing across the country in more linear, sensible markets. Got a lot of property in these different markets. But let's look at the example here. So Richard was saying, I was saying, you know, let's take a $500,000 single family home, okay, which is, you know, the median price here in San Diego is about 560,000. So let's go a little below that. Let's take a $500,000 home. Now we know that home will rent for approximately 0.5 RV ratio. It'll rent for about $2,500 a month. Not the targeted, the Jason Hartman targeted rate of 1%, which would be $5,000 per month. So if you were to buy five single family homes in any of our markets, really, but say it's, you know, pull a market out of the hat, say Memphis, for example, and they were $100,000 each, the target would be to rent those for $1,000 per month each. So your $500,000 more diversified portfolio would give you five units generating $5,000 per month. Now let's compare that. I said to Richard, I said, okay, well, you're still pretty bullish on the San Diego market. And how much do you think prices might go up here over the next three years? And he says, well, you know, they're not back at the prior levels yet. And historically, if we look at market cycles, they typically will go up beyond a little bit beyond the prior peak. And the valley, by the way, he didn't say this, but we both knew this. The valleys are never usually as low as the prior valley. So the trough in that market cycle and the peak in that market cycle always up levels from the prior cycle. At least that's what history tells us. Okay, so that's fine. So now we take our $500,000 house running for 2,500 per month, and we have to consider the 2,500 per month that we are not receiving in the cyclical market, we have to consider that a loss. Well, why is it a loss? Because we're not getting the money. Because if we could deploy $500,000 and get $5,000 per month and we're only getting 2,500 in a place like San Diego, we are losing money. We have an opportunity cost there. So over the course of three years, 36 months times $2,500, that's a $90,000 loss, $90,000 loss over 48 months or four years, it's 120,000, and over five years it's 150,000. So I said to Richard, I said, well, how much do you think it could appreciate here over the next three years? And he says, well, three to five years, I would say, you know, being still rather bullish on this market, that we could see 30% appreciation because we're 20% off the peak of the last cycle. And so 30% of $500,000 means that you would see $150,000 in appreciation over the next three to five years. Okay, so the risk we have to take to gain the potential $150,000 in appreciation is either $90,000 loss in cash flow over three years, $120,000 loss in cash flow over four years, and $150,000 loss in cash flow over five years. Now, I know hopefully you're going to be able to raise your rent a little bit in there. And that's not factored in. I'm doing some. You know, these are back of the napkin, almost literally calculations here because I've just got my Venture Alliance Moleskine notebook here. We gave those out at the last Venture alliance meeting with our beautiful logo on the front of this navy blue book. It's not back of the napkin, but I'm just sort of scribbling out some of these numbers to talk to you on this podcast about it. Okay, now, the appreciation at 20% would be $100,000 on your $500,000 property, 125 if it goes up 25% or 150,000 if it goes up by 30%. But you know what Richard and Derek and I forgot to calculate in that meeting? In the linear market, it may not appreciate as much as the high flying cyclical spirit speculative market, but it does chug along and do its thing at a linear appreciation rate. Well, I didn't compound these. The proper way to calculate the appreciation would be to compound them. I'm not doing a compounding calculation. This is just a simple calculation. And you know what? It's pretty good. Okay, compare it to the cyclical market in California. Right? Well, if it appreciates at 6%, just as an example now you might say It'll only do 5% or 4%. Put in whatever number you like. I'm going to use six, which is kind of that national average type number. And I'm going to take three years non compounded, which is actually improper because you should be compounding it. And at 6%, we would just multiply six times three, 18%. Well, guess what? 18% is 90,000 bucks in appreciation over three years on your $500,000 diversified portfolio. Remember, you've got five houses working for you instead of just one. So much lower risk. You could have three of these houses in Memphis and two of them in Indianapolis, for example, and you would be better diversified. You could have two in Memphis, two in Atlanta and one in Indianapolis, and you would be more diversified. So any way you slice it, if you have a vacancy in one of your five houses, your vacancy rate is only 20% of your portfolio in that given month that you have a vacancy. Whereas if you're $500,000 property in San Diego, in this example, you have a 100% vacancy. And if there's a downturn in the San Diego economy versus a downturn, you'd have to have a downturn in two or three markets to have it really hurt you as bad. Right? So the diversification makes a lot of sense. Take the most historically proven asset class, but diversify geographically. Okay, what if your $500,000 portfolio non compounded appreciation rates over four years, six times four is 24, then you would make $120,000. That's your 24% non compounded appreciation. It's actually better if you compound it. And what if it took five years? Okay, so five times six is 30. So we're going to take $500,000 and we're going to take 30% of that number, right? And we get $150,000. Now in the cyclical market, you beat that slightly until you get to the last number at five years. Because here, if it only takes three years to have 30% appreciation, then you would have 150,000 appreciation in the cyclical market. But in the linear market, you would only have 90,000 in appreciation. But wait, there's more. Let's go back to the cash flow number. Remember, over the course of that three years, we had a loss if we bought the San Diego property of $90,000 in cash flow. So 90,000 loss in cash flow plus 90,000 in appreciation is $180,000 versus $150,000 in appreciation in the best case scenario in the cyclical market. So you can see that this really, really makes the case for being a conservative, prudent, long term buy and hold investor in linear markets. When Richard and Derek and I were sitting at Starbucks looking at it, we did not consider any appreciation at all in the linear market. So we were thinking, well, you know, take a gamble, roll the dice. You do the San Diego thing, it might work out better for you, but really it's pretty unlikely that it will. By the time you lose $90,000 in cash flow over three years, $120,000 cash flow loss over four years, or $150,000 cash flow loss over five years, I mean, if it takes five years to get 30% appreciation in the linear market or in the cyclical market, I should say you just broke even. You got 150 grand in appreciation, but all of those months you had the risk of a staying power loss, maybe being forced to sell sometime in that period because of a job loss or something. Because remember that cyclical market property is like an albatross. It's an alligator, actually. Sorry, it's not an albatross, it's an alligator. That's what the real estate investors call properties with bad cash flow. They call them an alligator. It's an alligator around your neck because it keeps eating at you. It keeps eating at your wallet. And you're going to lose $90,000 over three years, your loss in cash flow there. So I say I am still a firm believer in being a linear market investor. Now, remember, for 19 years of my career, I was a cyclical market investor, okay, I was buying California. I was drinking that Kool Aid, and, you know, a lot of times that was the same Kool Aid I was spewing to other people. But as I became older and wiser, I realized that I just got a lot more conservative. You know, I saw a couple of down cycles and I just like my nice linear properties where I don't have to think a lot about them. I can sleep well and they just keep chugging away doing their thing, and they've just got good cash flow. Remember, you know how I talk at my creating wealth in today's economy boot camps about sustainable investing? Everybody talks about sustainability in terms of the environment, right? Well, I talk about it in terms of investing, okay? If you want to be green, be a cash flow investor. That's being green in my book. And when you just look at this and you do the math, it, you know, granted, it could go the other way in a positive direction in the cyclical market and you might fare better, but the likelihood is you won't. The likelihood is you're going to be better off, you're going to gain more wealth and you're going to have a lot more peace of mind in the linear, conservative market. In the markets we're in. In the markets you will find@jasonhartman.com properties jasonhartman.com properties. Those are the nice linear markets that we really, really like. And by the way, while you're there, click on events and sign up for our semi private small group 2 city property tour in Grand Rapids and Chicago. You want to learn about land contract investing. You want to learn about a hybrid market which is Chicago. And admittedly, you know, I'm not any fan at all of Chicago politics for sure. But wow, the appreciation and the cash flow there is pretty darn good. It's amazed even me. Okay, so come join us. Fernando and I will be taking a very small group of investors around. We figured we're going to be there, we might as well put out the invitation. We will have a good, good time. Join us for that Jason hartman.com click on events or jasonhartman.com events for the direct link and sign up for our two city property tour. In two days you're gonna get two markets and you're gonna hang out with us in a nice intimate small group environment and you'll learn a lot and you'll see a lot. That's July 16th and 17th. Okay, we look forward to joining you. Here's our guest today. Let's talk about the real estate market and economics overall with the chief economist from First American. Here we go. It's my pleasure. Welcome Mark Fleming to the show. He is the chief economist at First American. Now, First American is a huge group of companies and maybe I'll let Mark explain that to you a little bit more. But we have looked at their reports over the years. We had one of their economists on many, many years ago and he had some interesting thoughts on the housing market, on linear and cyclical and hybrid markets and a whole bunch of things. So let's dive into that again today. Mark, welcome. How are you? I'm good.

Thank you for having me.

Good. It's a pleasure to have you on the show. So tell us, you know what, what, what are you most working on nowadays at First American?

Well, obviously, as you mentioned, First American is heavily involved in the housing market, a large title insurer and provider of settlement services so ingrained in the process of buying and selling homes. And so one of the things for me as a chief economist, the role that I have is to have an understanding of the housing market. What's driving sales activity and prices? What are the impediments to more activity or what's looking forward? What are the risks to future activity in the housing market today?

And just so the listeners know, you're actually based in Washington, D.C. but you happen to be in Santa Ana at the big Monticello headquarters now, right?

That's right. I'm based in Washington D.C. but I'm here for other meetings as well at the Santa Ana office and honestly enjoying the California weather quite a bit.

Yeah. Good. And I did want to make that clear because we have listeners in 164 countries. So Santa Ana is in Southern California. Good stuff. So which way is the market going? You know, everybody wants a prediction of what's going to happen next. Mark, what are your thoughts? Long, long question. And it can be sliced and diced many ways. Right.

Well, so when I was in graduate school, my professor said, if you're going to forecast something, either forecast the amount or the time, but never do both. So we'll start with the timing. I think we've had a number of years now since the end of the recession and I think the housing market has taken longer obviously to recover than the broader economy. And that's largely because it was the primary driver of the recession in the first place. But we're on a pretty solid foot. Things are happening. The housing market is growing, sales volumes are increasing, maybe not every month, month over month, but I like to look at year over year kinds of statistics because we really want to sort of gauge ourselves, say in May or June, how well are we doing relative to last June? And I see strong growth in sales volume activity, which is to be expected today. And so that indicates a healthy market. There are elements though that the market could be doing better, at least by historical standards. When someone says, well, it's not enough, I always ask the question, well, what's normal or what is enough? And people say, oh, home sales transaction volumes of 7 million home sales per year on a seasonally adjusted basis, like at the peak of the market. Yeah, that's probably not where we want to be, but we're, according to the national association of Realtor statistics, just over 5 million existing home sales a year. We probably could be a bit higher than that. And there's some good reasons why things are different today than say they were prior to the housing crisis that are causing that reduction in sales volume or activity.

Right. You made an interesting comment there. You said that the 7 million number is not where we want to be. Now is that because that's indicative of a bubble?

Right, that's indicative of the bubble. If you think about a lot of what was happening in 2004, 5 and 6, broadly speaking, in the US housing market, obviously concentrated in some of the well known states where the bubble was Going on. There was a lot of incentive for housing turnover. So people were buying and then quickly selling and in many cases flipping, like in days. So there's a lot of sales activity that was speculative, irrationally exuberant, to borrow Robert Shiller's term, who borrowed Alan Greenspan's term. So this idea of a lot of speculative activity in housing, what I call turnover in the housing market, that wasn't fundamentally based upon the idea that really a sound housing market is based on, which is people buying and selling homes because they want to live in the home. If they're a first time homebuyer, become a homeowner because they want to upgrade. The economists call it utility of shelter that they get from living in a home. Right. Having a roof over your head and having a nicer kitchen, you get more utility out of that if you enjoy cooking, for example. That sort of fundamental basis of home sales activity that is the first time home buyers and move up buyer activity got sort of replaced or got augmented by a lot of irrationally exuberant speculative behavior that led to a high number of turnover of 7 million. And fundamentally we shouldn't have been there. It should be really what drives sales turnover activity is that concept of first home buyer and move up buyer, in addition to obviously the population and demographic trends of a growing population, more households in that 24, 25 and above age group, which in a very slow and steady way increases the volume or the size of the housing market as there are more people in the United States, basically.

So I kind of asked you the general question that anybody would ask an economist or a housing market economist especially, where's the market going at the beginning? But of course we both know that in a country as large and diverse as the United States states, we really have nearly 400 real estate markets. So can you kind of drill down and talk to us about some different regions and so forth? You know what maybe what you see and what your thoughts are of those regions. And interestingly, I had Meredith Whitney on the show a while back and she wrote a book you may be aware of, called the State of the States and talked about the migration trends of people moving to more business friendly states and so forth. And I think a lot of that impacts the housing market. So wanted to get your thoughts on that.

That's right. So let's break it down into a few elements there. Certain states are certainly associated really more with different types of industry bases. So for example, Texas, the Dakotas, Oklahoma, we'll call them the energy states, have had up until recently had a very good run of things. House prices and sales volumes were skyrocke in places like North Dakota. In fact, there was such a housing shortage a few years ago or up until last year in a place like North Dakota as the shale and oil boom happened up there that has, you know, they had a good run. There's been a significant correction in the oil based markets in the United States because of the fall in prices earlier this year that is playing out and connected to the housing market. In fact, markets like North Dakota are having sort of mini, I won't necessarily call them housing recessions, but basically corrections based upon supply and demand.

But you know, that market isn't diversified at all. I mean, Texas at least has diversification, right?

Exactly. That's the key. That's what I was about to head. Texas, you think, oh, is Texas going the same way as North Dakota? No, they had their undiversified oil based industry housing recession in the late 70s and early 80s, the oil patch recession along with Oklahoma. But more recently than that have become well diversified economies. You think of a market like Austin that's really not very little energy based to it. Dallas has a good mix. Houston is feeling it a little bit more because it is more strongly associated with the energy industry, but not nearly as hard as it used to be. So Texas is faring much better. Then you have the, we'll call them the judicial foreclosure and non judicial foreclosure housing boom and bubble states. And there's typically an east west divide to that. So you have markets like New York, New Jersey and Florida for example, that had housing booms and the subsequent busts that we're all very familiar with high levels of foreclosure activity being created. But they're all judicial based foreclosure states. And for your audience benefit, that means that in order to process a foreclosure on someone who's not paying their mortgage, you have to go to court, go through the court system to do it.

When you started talking about judicial foreclosure states, I wanted to just ask you, you know, maybe, I don't know if you even comment on things like this, but philosophically, what do you think of that? I mean, should they all, you know, should we move away from the judicial foreclosure? I mean, you know, we've, we've done stories over the years about people in Florida, you know, living in their house for three and a half years without making a single payment. I mean, listen, I'm no fan of crooked banksters, but that's ridiculous. You know, I'm no fan of deadbeats either.

Right. I think so. There's two elements to it, so I always like to separate it out. Is, you know, in theory the idea would be that a judicial foreclosure process creates an extra layer relative to non judicial theoretically of protection for the consumers to make sure that, you know, they're, you know, you're not, that you're rightfully foreclosing upon them. That would be the theory, right?

Yeah.

So the question is, and I don't know that it's necessarily well answered, is, is the judicial foreclosure process creating a protection benefit that the non judicial process doesn't have? Or another way to say it is, are people being erroneously foreclosed upon in non judicial states because they don't have a judicial foreclosure process? Right. And I don't know that there's a lot of evidence to that. I think the bigger problem that's arisen is obviously going through the court system takes time and there's a capacity issue in the court system. But the foreclosure courts in places like Florida were simply not set up to handle the deluge that hit them. And so these long timelines to foreclosure are in part a function of a system that just doesn't have the capacity to process what's happened. And then people staying in these homes for those lengths of time is a result of that, not necessarily a result of it being a judicial foreclosure state. But for the housing markets perspective, you have the challenge, which is it's kind of like ripping the band aid off the non traditional markets, typically out west that were hit by the boom. So California is a really good example. Arizona, Nevada, great examples. They have processed through their foreclosure backlogs much faster.

Let me just interrupt you for a moment and kind of explain that to the listeners when you have a more speedy foreclosure process. And that's why I was so against all of the Wall street bailouts, not just because it's unfair to the taxpayers, but because it would allow something economists call price discovery much faster and the markets can correct. And yes, it's painful, it's like taking, you know, a bad medicine. But in my opinion, it just causes a better economy because heck, you know, the foreclosures will happen, prices will suffer for a short time, investors will probably buy those foreclosures, then the homeowners will move into the market and then things will get, you know, recovered more quickly and These judicial foreclosure states. And Mark, you may well have a different opinion on this, but I see them just sort of acting the way our broader economy does with our money printing philosophy. We're just kicking the can down the road. You know, feel free to disagree with me.

Right. There's a malaise or a draft. So I use the analogy of ripping the band aid off quickly or slowly. Right. It hurts a lot more, but ultimately it doesn't hurt anymore at all. That's the non judicial side. The judicial side is ripping that band aid off slowly. So it never hurts quite as much. The housing market never is subjected to the pain of the pricing discovery as much, but it drags on and on and on and on. Right. And you know, I guess it sort of, I don't know if there's a right answer to it, but what we do see in these markets today is these foreclosure overhangs have meant that house prices have not grown as fast or not recovered as fast, and home sales have not recovered as fast. In many of these markets, from places like Florida and New Jersey and New York in particular, relative to places like California, you kind of get on with, with business. And so to use your economic analogy, everyone is often talking about the risk of economic stagnation today. Right. Or sclerosis in our economy today. And there's a lot of good, not good reasons. There's a lot of research going on as to why that's happening. But you know, these judicial based markets are sort of suffering from housing, housing, momentum stagnation, shall we say?

Yeah, they've got the hangover that may not be as bad, but it just takes so much longer to end.

That's right. That's right. Yeah. Hey, it was a New Year's Eve party. How do you want to take your medicine on New Year's Day?

Yeah, yeah. Do you do, do you want to take it in one day or do you want that hangover to last for the next three months? That's right. Okay. All right, good. So, you know, before we kind of got off on that tangent, you were mentioning what, what's going on in those, like you segment. Tell us how you segment the states, by the way. So you have the, the sand states, you have the energy states, you have the judicial versus non judicial states. You have a bunch of interesting ways to segment that.

Right. And then the oil or energy related states. That's a good example of basically you're following a market segment and an expansion in market segment. When you start to drill into it and you're right, I have a colleague who works in Australia and they have the major metros. There's like seven to 10 of them. I think he tracks each one of those 10 markets. Realistically, we have a few hundred major metropolitan areas. I can't track them and know these markets individually. So we lump things together more along economic market segments. So you look at energy, you look at health care. So markets in states that have a lot of healthcare related activity. Pittsburgh for example, is a really good example of actually a market that's gone from being a rust elk, old school American manufacturing based city to a high tech healthcare based city and is doing very well because of that. New York and LA tend to track together because they have similar economic segments that they're focused on in terms of entertainment and media, for example. But you look around and from a housing market perspective, what tends to consistently drive things is good job markets. People move to where they can get jobs and where the labor markets are good and where they can get paid well. And so anytime you can find, you know, you can basically track the performance of a housing market as a function of the performance of that economy's ability to generate jobs. And so looking at those migration flows and patterns of where jobs are, and then secondarily, because the baby boomer generation is now aging out of the workforce and there's such a big generation, there's going to be the influences of where are they choosing to retire. So there's big Florida and Arizona. The Sun Belts markets will benefit from that retirement migration. But even then there's a lot of debate about, well, many of these retiring baby boomers are actually staying put in maybe their northeastern city that they live in with the cold and miserable weather like Washington where I am in the wintertime. And instead of moving to Florida, they might be moving into a condo in downtown D.C. so sort of looking at the demographics ultimately in combination with the economic forces playing a very important role in how housing is going to respond.

Yeah, yeah, very interesting. Okay, so your take on, I mean like if you were an investor, Mark, you probably are. Where would you be investing? Do you have any opinions like that?

Right. So I, I tend to, I start with. Because real estate is so local. I start with if you're going to invest in individual properties, certainly in the real estate world, then you need to know your market. You probably know your own where you primarily reside. But I wouldn't go invest in markets that I don't know or understand the economics and demographics of. You can go and learn them first, if you want know your market, because that's important. And then I think the trends that we focus on, I think the trends to focus on today are the combination of where will millennials want to live? From a market basis or within a market, where will they want to live?

Good segue. We're going to dive into that topic of the millennials because it's a hugely important factor.

And then where will they're hugely important? I mean, they're a larger segment than the baby boomers in terms of overall population size. And then looking at where is the baby boomers? Because the two demographic things are happening, underpinning everything right now is the aging into the primary working years and home buying years and household forming years of the millennials and the aging out of the workforce of the baby boomer generation and what their decisions will be. So looking at the demographics of where those two main cohorts. I'm a Gen Xer, so you don't need to worry about me, but those two book ending cohorts are what they plan on doing over the coming years will really drive the success of your investment decision.

No question about it. Very good point. And I'm a Gen Xer too, so I'm right there with you. In our tiny little Gen X generation, you know, that's, that's half the size of the boomers and the millennials. They're, you know, these huge generations, obviously, these big cohorts. Well, you know, I always like to say, Mark, that the best thing anybody can have on a resume when applying for a job is mobility. This is one of the reasons I think that it's very wise for generation Y to not buy a house. I, I think, you know, it was interesting that article that, that big article that Time did a few years back, I'm sure you're familiar with it and it, where they studied, you know, this concept of, you know, is homeownership good for the economy? And you know, generally at first, Blanche, you think, yeah, it's good, right? Because people put down roots and they fix up their house and they spend money and form communication, community and all that sounds great and I agree, but, but it, it also makes the economy stagnant in some ways and reduces the velocity of money because people are trapped, they can't move. You know, and when the economy changes, as it has over the years, so many times in, in California where people have wanted to move out of state for better career opportunities, you know, they're stuck. Maybe they got to put it off for a year because they got to deal with selling their house in most of the time a bad market. So that's important to consider. Now generation Y is doing their family formation. They're delaying marriage, they're delaying family formation. But even when they're doing it, they're saddled by over $1 trillion in student loan debt. They, they want that mobility. The world just feels more mobile nowadays due to technology. They're not buying as much as they used to. And to add to that, a psychological component. A lot of them witnessed their parents get hurt in the housing market in the Great Recession. Are they more skittish and you know, what's going on with them? You know, what's your take?

It's tough. I mean, you covered a lot of bases just there. Hopefully we'll get back to all of them. So, first of all, I agree that the concept of job mobility, in fact, the concept of job mobility has been one of the successful hallmarks about the flexibility of the American labor force, has been a big benefit to the economy. But there's actually some research. I think the Census Bureau put it out a year or two ago when this, the argument goes, as you said, that mobility is more important than ever, job mobility is more important than ever, and therefore people need to have the ability to move from one city to another. But I think it was the Census Bureau, I'm testing my memory here, that found in the data that actually most job mobility was within city. So people change jobs, but they don't change the city that they live in. And so they don't necessarily need. You have a fair amount of economic mobility or economic job mobility, even if you're not necessarily house mobile. Right. And so maybe I don't want to call it an overall red herring, but there is counter evidence that potentially it may not be as, as big of an issue as, as some suggest.

Okay, so let me, let me address that so that, you know, we, we've got to ask ourselves, don't we, is that because of homeownership or is it in spite of it?

Excellent point. Is it causal or correlated?

Right. Yeah. Better you have, the economist puts it better. Is it causal or correlated? So I would argue that some of the reason that mobility hasn't been longer distance is because people couldn't do it. They would just maybe increase their commute to go get that job. You know, if they lived in la, they'd go work in the Valley, or vice versa. It'd probably be vice versa in that instance.

Well, you know, to take that to the next step is in most circumstances. So the cause of housing immobility is obviously lack of equity. Right. So certainly if you're in the extreme case underwater, and we know that obviously there was a large group of homeowners coming out of the housing recession, that, that was a big issue because you have to bring money to the table or facilitate a short sale to get out from under that. And so in recent years, there's clearly been some effect of home ownership and mobility would stymie your ability to move for a job. But if you look historically with longer history, I mean, I haven't looked at the data, but this would be a good thing to do is to say pre housing crisis, the issue of people being underwater or having insufficient equity in their homes is a relatively rare event. So how mobile or what were the mobility patterns? Realistically? Most homeowners in the 80s and 90s and early 2000s, they didn't really have an issue of homeownership mobility. There was a transaction cost issue. I sell my home, I buy a new home that's got transaction costs. But basically I'm going to factor that into my decision about the job, right? Is it worth moving and having those transaction costs to get that new job?

So a little more on that. I mean, I don't want, you know, we don't need to belabor this to death, right? But if you own a home, you, you, you probably have more stuff, okay? And moving is a greater hassle and maybe just psychologically you feel more permanent, you've got to deal with showing the house. I know that five, six years ago when I wanted to move out of the socialist Republic of California and moved to Arizona, which I finally did, you know, I tried to sell my house for about a year. You know, I had to deal with people coming through and showing it. And I pretty much always was a homeowner. And of course I own many, many investment properties around the country. But now I really quite like renting. You know, I give 30 days notice and move. I mean, moving is enough of a hassle without keeping the house clean every day and showing it. And the high transaction cost, which also may put off an employer if they've got to pay for reload expenses. I mean, I've seen friends and clients of mine get these. When their homeowners get these giant relocation packages, you know, 40, $50,000 to relocate, you know, I mean, God, I just can't imagine employer paying that kind of money, you know, because they've got to pay those commissions. You know, the closing, the selling costs are around 8% on the property to sell it. And then they've got to do movers and everything else on top of that, you know, so.

So I think what you're framing is really is the question becomes sort of that trade off from an, From a. From the economy's perspective of what's the right level of mobility to facilitate healthy economic movement of people moving to where the jobs are and people and sort of optimal allocation of resources. That's a very technical economic way of saying it, right across all the industries versus the, you know, and the costs of overcoming the immobility that's inherently associated with homeownership. But I would also, there is an immobility force that is. That hits renters and homeowners alike. And it's the age old. I'm going to stay put for a few years because my children are heading into high school. Right. That's the classic. Right. And I think ultimately millennials and every other prior generation, one of the largest forces of really the decision to be a homeowner is really about that family formation and having children. And, you know, millennials, for many of the reasons you stated, are rightfully sort of delaying those decisions. They want to have the mobility. They're taking more time to get educated. That takes time. They want to establish their careers. That takes time. They will, you know, I'm sure that they will ultimately have marital rates similar to they might choose to start getting married later. But ultimately, as a generation, we'll have a high marriage rate like every other generation prior to them. And then once they do those incentives to become a homeowner and consider it's worth having that immobility for the benefits that I get of homeownership.

Yeah, yeah, interesting point. So how big a factor is that, Melania? I mean, we covered all the, a lot of these bases on the millennium thing. We didn't talk about the student loan debt issue, but we can do another.

Show on that one.

Exactly. That's a whole subject, and we've dedicated several shows to just that one single topic. But how big, I mean, how important is it to the housing market that millennials start buying, for example, or what happens if they keep renting? I mean, for investors, that's good. Upward pressure, more demand for rent rentals. Right. I mean, certainly you see a lot of these institutional investors building apartment homes like crazy. I mean, I just cannot believe the development and the skyrocketing prices of apartments. I just sold two of my apartment complexes fairly recently, and wow, I think these investors are crazy to Pay those prices, but they paid them. That's right.

So there's two elements to it. One is, I think we often we talk about the housing market. We're focused on the owned housing stock. But reality, the housing market is to house everybody, and it includes the rental market. And so the good news is, at the moment, the millennial generation is forming its own household. It's proverbially coming out from their parents basements. Right. So we see if you actually break out the household formation numbers over the last few years, we've seen a lot of rental household formation, and that is expected to continue as this generation ages into having its own household. And usually the first one you do is a rented one. Right. So there's going to be a persistent level of rental demand over the next five, 10 years. If that happens, eventually there will be a bit of a transition back towards mixing back more owned in. Since the end of the recession in 2009, the average household owned household formation rate is negative 0.3% year over year. We're basically done south. That's why the homeownership rate is falling. Even though we have more households today than we had in 2009, there's been a shift towards rental. I don't think it will stay that way. There's a great Urban Institute study that came out a couple of weeks ago that says the homeownership rate will shift to the low 60s. We're in the 63% range right now. It might go back up ultimately as the millennial generation really gets into those forming families and having children ages. And that might not happen until they're on average in their mid-30s. That could be 10 years from now. But that's when the shift will really come back to a push back towards owned stock. And a lot of the owned single family detached stock that is rented right now will be easily converted into owned. And we might get a resurgence in that classic condo conversion on the. Of the multifamily stock.

Yeah, yeah. Very, very interesting. It sounds like we agree pretty much then on what's going on. And I know we're going a little long, so we need to wrap up at least for. For your. I talk to you all day. You're interesting guests, so thank you. But it sounds like we agree on this the next. I, I say it often that the next. The demographics coming at the rental market over the next decade are pretty phenomenal. Possibly the best they've ever been in history. Possibly. You know, it's hard to tell, but it's pretty Phenomenal. And we need to. When we talk about the housing market, everybody just thinks, oh, it's good if prices are going up, it's bad if prices are going down. And there's much more to it than that. There's the rental housing market, the for sale housing market. And, and then it depends what side of the table you're on. If you're a buyer, a seller, a.

Renter or a landlord, the substitute ability between. I mean, is there sort of to be a little bit economically technical sort of. These are substitute goods. Right. Renting versus owning. And you know, the big demographic shifts are playing a very important role today in what's going on. And you know, ironically, certainly on the own stock side, there's some really interesting things where economics 101 doesn't hold. For example, more homes sell, more existing homes sell when prices go up. You think, well, why there shouldn't be more demand for homes when prices go up. You know, typically when a price of a good goes up, the demand for it goes down. The problem is that most homes that sell, the person is getting a wealth effect. I feel more wealthy, therefore I want to move.

Yeah, I call that real estate relativity, you know, because it's all relative to what you have versus what you need to buy. But the prices, that happens to a point. I mean, at some point the lenders start to balk and, and everybody starts to say this is a bubble. And then they don't. It doesn't do that forever. There's sort of a curve there, right?

That's right. That's right. I mean there should be some checks and balances in the market, particularly with the first time buyers, because they lose affordability when prices go up because they don't own the asset yet. And so that sort of should curtail the demand as prices rise and sort of put that brake on the system.

Very interesting. Mark. Give out your website, if you would.

It's www.firstdam.com and if you go to my corporate site, firstam.com, you can find there's an economic center there where you can follow blog posts and presentations that I'm providing in my Twitter feed.

Yeah, you guys have a great research department. I like your stuff a lot. So keep up the good work on that. I got a final question for you and then I'll let you make any comments here.

Sure.

What do you think the homeownership rate should be? This is often talked about and I believe that the homeownership rate should be around 50%. And you know, People in real estate say, oh, are you crazy? That's just terrible. That's a terrible idea. Don't you want everybody to own. Well, you know, we saw that ownership society concept fail completely. I just think there's some people that don't deserve to own a house, aren't responsible enough to own a house, don't want to own a house. You know, I own lots of income properties, yet I'm a renter, oddly. What do you think the homeownership rate should be? Do you have an opinion on that?

Yeah, I mean, that's a great question. I think that's really the key question at the moment. It is, certainly with everyone talking about the idea of income inequality and wealth inequality. Well, being a homeowner actually helps you address that very significantly, I would say. It's hard to know what the right number is. I would argue if you look back historically, in the early 1990s, we had a pretty stable homeownership rate of about 65%. And it was all the effort of the late 90s and into the 2000s that got us to 69, which was clearly too high. Right. So I look at, say, look, 65. We had well functioning housing markets, we had well functioning mortgage markets. There was a reasonable amount of risk being taken in the mortgage finance side that was handleable with a 65% home ownership rate. I think there was some demographic shifts that maybe there's a good reason to be below 65 at the moment, with demographics conflicts we've just been talking about. But 65 seems to me like a reasonable number over the long run, certainly as the millennial generation gets into the more need of their home buying age years later, in five or ten years from now.

That's a good point. A lot of it depends on the demographic cohort of and where they are in their cycle. So certainly when Generation Y is 45 years old, you could. You should expect a higher homeownership rate, hopefully, in a way. So. Very good point. Very good point. That's a. That's a moving target in terms of a number. Well, Mark, this has been a fascinating conversation. Thank you so much for joining us. Any closing comment? Maybe a question. I didn't ask you that you wanted to, you know, anything you want to say?

No, I think we covered a lot of good ground, I would say. I really do. It's a little bit cliche to use the term new normal, but I think the housing market is really experiencing a new set of normalizing factors that drive it, both demographic and price base. With rising rates and things like that, it's hard to look back and say it should be like it used to be. I think we're in a very different environment today, and that's good. That provides lots of opportunity for me to do the research and for people to, you know, speculate on the market in ways that can be very beneficial.

Everybody, that's Mark Fleming, the chief economist with First American. Mark, thank you so much for joining us today.

My pleasure. Thank you.

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