Interview Transcription

Brian: Do you think that the real estate market is going to improve for the next couple of months?

Mark: It may a little bit, I mean inventory and sales are very seasonal and we are sort of going into the end of the prime home buying season, so it might just be a seasonal upward tick. As you have said the problem is that there are so many existing home owners out there today who really don’t have the incentive, as they have had in years past, to want to sell in the first place. So, you don’t see sales because you don’t see people wanting to move.

Diana: But Mark, what about prices, I mean we have seen affordability really hurt, especially as we have seen mortgage rates increase this past year. Do you really hit a wall in prices? Or if there is so much demand and so little supply can prices continue to go higher?

Mark: Yeah, that is a great point. Well when you have a lack of supply, relative to demand, and we have very strong demand in the form of a millennial first-time home buyer, then prices go up. So, it’s not a surprise that prices are rising. I think to your point; how long can it go? But you have to take into account, even though rates have gone up a little bit and we have reduced some affordability, when you look back from a historic perspective, even a mortgage rate at 4-4.5 percent allows you to buy an awful lot of home and that’s one of the main reasons why we continue to see the purchases that we see, and the prices rising because in the long-run basis it’s still affordable.

Diana: Well Mark, you talk about trends all the time. We talk about millennials wanting to be near the city. They are obviously aging into their marriage years, their child years, they want to live out in the suburbs, but we have so many more single-family rentals now. Do you think that this desire to rent will continue for them even in their supposed home buying years?

Mark: Well there’s two points there that you make really that’s that for one, the move out to suburbia driven by lifestyle choices, like every other generation, may be a little bit later than other generations. That desire for suburbia and what it provides when you are raising a family is very alluring. About a third of all houses in the housing stock are traditionally rentals, so we have always had a pretty large rental share of houses out there but if there is demand, there in an incentive for the owners of those rental properties to potentially turn them into owner occupied.

Brian: Yeah, this is a big issue. There are 88 million millennials, 74 million baby boomers. We’ve got this massive generation coming out. I think the number one age is 27, there’s 5 million or so 27-year-olds out there, Mark. They are about ready to enter that time in their life. What’s going to happen to housing prices if we don’t build more housing stock? Where are they going to go?

Mark: There is a great demographics story, we have a 10-year-long run tailwind ahead of us. We have already formed 8 million new households in the United States since the end of the great recession. And we have only built about 5 million new housing units, so that to me, is also a larger issue. We need to build a lot more and that’s not easy. If we don’t, prices will continue to rise, and the market forces will take into effect and people will start to not really be able to afford homes. We already see that in some markets, San Francisco, is a classic market. Most people who are renters today in San Francisco can not afford to buy most of the homes that are for sale.

Diana: You know, I talk to a lot of builders and they argue that they can not build affordable homes, not with the high price for land, labor, materials. And now we have tariffs mixed into that: Canadian lumber, you have steel tariffs, you have aluminum tariffs. They claim that all they can build is the ‘move up’ and the luxury home. Where do you get that entry-level housing stock?

Mark: That’s a huge challenge. The fixed costs going into building the homes because of regulation zoning in many parts of the country are quite expensive and the higher production costs there too. The home construction industry is really on the verge of a potential, significant increase in productivity. If you think about it, we really have built homes the same way we have always built them for the last 50 years. We haven’t seen much productivity gains in that space. Many of the larger homebuilders are now looking into modular and manufactured portions to reduce costs and help to sort of make the economics work at those lower price points.