Willy Walker: So good afternoon, everybody on the east coast and good morning to those of you in time zones further to the west. My colleague and friend Ivy just came zooming in at the last moment, and so I’m just smiling a little bit because she's safe at second base. But just by the merest of margins. Ivy, it's great to see you. And Dennis McGill, her partner at Zelman, has joined us today for our discussion. On both Ivy's fantastic book, Gimme Shelter, as well as all the research that's Zelman is putting out today.
I wanna start with just a quick anecdote from the last time Ivy and I spent time on the Walker Webcast together. I generally speaking, spend somewhere between five and seven hours getting ready for the Walker Webcast and build up pages of notes that are far more than I need to get through an hour with my guest. So, with most guess that I have on the Walker Webcast, of my six pages of notes, I usually get through something between three and four pages. There's been a rhythm after now having done the Walker Webcast almost eighty times, where I leave a lot on the table, if you will. The only person, only, out of all of my guests whose notes I have run through during the course of the webcast was my first webcast with Ivy. And I ran through my notes in forty-five minutes, so the last fifteen minutes of the last time I was on with Ivy was all adlibbed. The reason is that her responses to my questions were so good and so succinct that we just moved from question to question to question to question. And I think it's one of the reasons why well over 100,000 people have watched the replay of the first time I had Ivy on the Walker Webcast. And it's a real thrill to have her back.
And it's also great to have, I guess, Dennis, you're either the peanut butter to the jelly or the jelly to the peanut butter. But as Ivy says in her book, you have been an incredible partner to her throughout her time on wall street, as well as in the building of Zelman & Associates. And it's great to have you with us.
Let me dive in to Gimme Shelter to start, because I think it's a great framework to focus first on Ivy, your incredible book, your incredible career. Then as we move through that, we get to a point in the pre-great financial crisis where you and Dennis put out a research piece that was a seminal piece. It changed both of your lives, changed a lot of people's opinions of you on wall street for a period of time, and then flip back to an incredible opinion of you guys when it was actually spot on and then take that to where we are today and some of the research and some of the data and numbers that you're looking at today.
So, Ivy in your book, in your preface, you talk about a couple things that you learn during your career. First ask for help. Second network and establishing what you now have is an incredible network of friends, family, colleagues, and peers in the industry. Pay it forward, I think your book at its core is a pay it forward to try and give up and comers some insight into how you built your career and how you've been so successful. Don't be afraid if your background isn't a traditional background as it relates to a career, whether on wall street or anyone else. And the final one is take risks. Is that a fair summary of kind of the reasons on why you wrote the book and what you're hoping people would take away from it?
Ivy Zelman: Excellent job. First, I apologize if I got you a little anxious. But I am never late. I live by punctuality, so apologize to get you nervous. But no, I wrote the book as a project that kind of started out with this idea that I could really provide some inspiration to young people. Hopefully, that's what it does in fact do. But what's been really fun is also the response I've had from people that have been twenty, thirty years veterans, because it really gives them an ability to reminisce on their own career path. But it's been a lot of fun. And I feel like I've put myself out there quite vulnerable, but I think that it's important to pay it forward.
Willy Walker: So you were the only person in your Solomon Brothers analyst training program who had gone to George Mason university. When I read that, it resonated with me because I was the only person in my Harvard Business School class who went to Saint Lawrence University, as well as the only Saint Lawrence grad who was in my associate pool at Morgan Stanley. As you look back on it what was the core skill or, if you will, personality trait that that outsider status helped you develop?
Ivy Zelman: Grit, just total grit, passion for success, wanting to be financially independent. And while, unfortunately, my father's fortunes we had been in a well-off situation his career turned south, and I was left on my own, and I never wanted to experience that. So, I was very determined. Just maybe the tomboy in me, I was middle of three girls. I am the middle of three girls and very athletic. And I was determined to be a winner and successful.
Willy Walker I will say from the pictures in your book, Ivy it's hard to believe that at any point, you were a tomboy. Given your hair from very big to kind of small to back out, it's a... I love watching the pictures of you throughout your life as you both aged as well as became, if you will, more and more professional in your overall demeanor and outlook. It was really fun to watch that. And I love the fact that you put those personal pictures in the book.
Ivy Zelman I’m glad you enjoyed it. Actually, the big hair was the thing in the 80s. So, I was quite a rocker, which is kind of, why I utilized Gimme Shelter for this book because it really signifies my persona. So, it's a combination of professionalism and just good old classic rock and just growing up with a big focus on music when I was young.
Willy Walker: When you first started out at Arthur Young, which became Arthur Anderson, the accounting firm, you started out as an administrative assistant. As you write in the book that gave you a great appreciation for people who are in support roles, and in focusing on people who are in support roles, you've actually created a great network that has helped you at various times of both gaining insight or gaining access to people by treating those people as the great human beings that they are. You want to talk about that?
Ivy Zelman: Yeah, absolutely. And just to clarify, it was Ernst & Young from Arthur Young. In a case.
Willy Walker: I’m sorry, that's right.
Ivy Zelman: That's okay.
Willy Walker: I was thinking that many people listening to wait a minute. No, Ernst & Young. They're still around unlike Arthur Anderson -- the demise of Enron.
Ivy Zelman: Right. Well, I think that having been admin and appreciating the importance of that role and really being the gatekeeper to the person you report to and having that person have a personal connection with you and appreciating that they're working hard as well. And I think that whether it be Stuart Miller, who's the chairman of Lennar or Sandy Levy, every day when I speak to her, and every day when I speak to her, I’m sure to ask about how was your weekend? How are the grandkids? Send me pictures and I really become friendly with these people. And so, when the shit hits the fan, excuse the language, you really need that CEO whether it be a public contact or private contact, you're gonna get through the gatekeeper. And I can tell you Kim Gray, who is my left arm, my right arm, every body part, and Melinda Greenwich before her, they're very protective of their C-suite executive. So for me, it's natural because I want to know about their lives. I want to know what's going in their family and how their latest vacation was. So, it's really just a natural aspect to me. It wasn't really something that I thought about. It just happened.
Willy Walker: There's a quote in the book that says, “I get dizzy, just talking to you Ivy.” And when I read that, I’m pretty sure that's in there and it was meant as a compliment of how insightful and how capable you are. But given how you write very openly and directly about sexism inside of wall street and the sexism that you came up against, I also couldn't help but read that and potentially interpreted someone making an advance at you. And you talk about in great detail being a beginning analyst at Solomon Brothers and someone whose name you disguised by talking about the very inappropriate sexual advances that he made it. And you go on to talk about sexism at other times throughout your career. And then in 2006, you were giving a talk right before the housing crisis. And you basically told the audience that they ought to either short or get out of a position in a certain home builder and that CEO was in the audience and came basically running up to you afterwards and almost hit you over. And you talk about standing up to him and basically not pushing him back, but with great confidence saying back off. If you want to talk about my opinion on your stock, go right ahead. But I’m not gonna have you bullying me. I thought about Ivy in 2006 versus Ivy in 1989. And I sort of thought, how can more women who are in Ivy's position in 1989 take from the Ivy in 2006, and obviously your reputation and confidence in job, security and everything were materially different in 2006 than they were in 1989. But any thoughts on that?
Ivy Zelman: To clarify again, I was actually at Solomon from ‘90 to ‘92 in investment banking when I was sexually harassed. And honestly, Willy, I wish I could tell you that I handled it well and I stood up to that man. Unfortunately, I didn’t. I found myself sitting at a table at an HR arranged conference room with the head of investment banking. And it's just amazing to me, because the only option that gave me with fifteen people in the room and being twenty-five years old, scared out of my mind, and actually not even wanting to get him in trouble. It happened because I was in a review where you had a coordinator that gave all the analysts in the seventy analysts that were in the two years program, feedback from their group that they work for. And I had raving reviewers except one guy. And I literally sang like a bird and they're like, it wasn’t him. I was like oh shit. So then, next thing I’m in HR meeting arranged at it and its fifteen people at a table. And all they wanted to do is move me out of the department. They never even dawned on them that maybe they should fire this guy. And now, in hindsight, so all I begged them not to move me, because I felt like I would be shamed. That I would have a label that would be forever following my career that somehow, she deserved it. It's something she did. She dressed too sexy, she's too wild. Whatever it was, I didn't want that label. And so rather than being moved, I persevered, and things got better and had already gotten better prior to the review. But if I can tell the women fast forward twenty, thirty years later, today, fortunately, we're in an environment with that's just unacceptable. It's a completely different environment. So, I think that we're fortunate today that that would never be the response, right? HR would never say we want to move you, they would fire his ass. They’d be done with him. So that's the great news today. And I think that we all need to draw the line on what's inappropriate. And what's like just, guys being guys and being in a locker room having thick skin. And I've got pretty damn thick skin, but I could tell you that that gentleman was Jerry Starkey, CEO of WCI homes. And I was on stage talking about investors gone wild, which was this incredible piece that we wrote the thematic report that Dennis and I worked on, really taking the veil off where everybody knew the emperor wearing no clothes is that the market is just overwhelmed of investors. And I mentioned WCI was one of those many companies that had a tremendous amount of investors. He came like a linebacker. I thought he was going to run me down and I was like, No! Back off! First of all, calm down. And I've had many other instances with CEOs that I had one CEO called me up after conference call. Or, no, it was because of something I wrote. And he's like, “YOU...” and I'm like, “Look, do you want to talk to me? I'm gonna get my director of research on the phone. I’m not gonna be spoken into the way you're speaking to me. Click.”
So, I think you just have to know what's appropriate, what's not appropriate. And do the best you can to persevere in that stressful environment. I mean I think my favorite line of the book that every woman can resonate, or resonates with every woman, is I'm literally seven months pregnant with my third child, the last of my three. And I am probably on my last trip that I can travel. The CIO of a hedge fund said, how far along are you? And I said, I'm seven months, actually, it's my last trip. I guess it's your first. I said, no, it's actually my third. I've gotten pretty good at this. And he goes, how old are they? And then I said two and four. He's like you should be home with them and you shouldn't be here. And I just honestly, Willy, was stunned. I looked at my salesperson like, are you gonna say something? And he didn't say anything. And I said, well, would you like to talk about housing because I am here. And that was it, but I didn't call him out on it because he was a big client. Today God forbid that man said it to me today. It would be a very different response. So sorry for the long-winded answer.
Willy Walker: No, it's very telling, and you do tell a story when you were at Credit Suisse about the head an investment banking calling you up, and basically saying we got a big client who's pissed as hell that you're not touting his stock and telling people they ought to buy and were losing investment banking business because of it. You actually held your rating; you didn't change it just because the head of investment banking… that's huge tension for you and Dennis to have dealt with when you were both at Credit Suisse.
Ivy Zelman: Actually the quote from the head of investment banking is, “do you know where your bread is buttered, young lady?” And pulled me out of a meeting I was at T Rowe in Baltimore, which God forbid like someone interrupt me with how important it was. And I don't know that... I digested that call and sort of tried to explain to him our view. But I was really steadfast. In fact, I wasn't a very good research analyst in terms of investment banking friendliness, because I didn't like a lot of deals. In changing a rating it never crossed my mind that I would take that conversation and actually do anything other than what I believed in.
Willy Walker: Your future husband David, when you were at Solomon Brothers, basically recommended you do channel checking. What's channel checking?
Ivy Zelman: So publicly traded companies provide a three-month update on their performance, and you as analysts are dependent upon updating your models and understanding their strategy from the C-suite. He said you know what? You need.... you can't depend on public management teams. You need to go out into the field, talk to their competitors, talk to their suppliers, and get the pulse of the market and learn from them. And that's what I did.
And it was easy to do, Willy, because the industry was so fragmented. Back in the early 90s, the public builders accounted for less than 10% of new home sales compared to 42+ percent today. So, there were many private builders that I would need at industry associations or then I would ask private builders, do you have any suppliers that you can connect me with? It was just constant. My husband always jokes, my wife likes meeting new industry executives more than she likes getting jewelry. I would always say that's not true. I'm quite blinged out. So, it sounds funny, but in all fairness, I just knew that would be a differentiator and talking to private companies, they don't have any type of bias of what their stocks gonna do. And they saw my passion and felt the energy and that I was a student, and I wanted to learn, and they were more than happy to help me.
Willy Walker: So, you made a point in the book that when you were on your first maternity leave, you tried not to watch the stocks that you cover, because you wanted to take a real break. And you actually took a hiatus from actually watching the stock some. I'm curious whether you've kept with that as it relates to... because as you describe very accurately in the book, what happens in the stock from a day-to-day basis does not have any impact on your overall view of either an industry or an actual company and how they're gonna perform over the short, medium, and longer term. Have you kept with not looking at the stock? Or do you still watch the stocks you all cover very closely?
Ivy Zelman: I'm an addict. I watch the stocks, but not anywhere near the emotional volatility that I used to have. I mean if I was recommending a stock and the stock went down, I could be in tears that night like within a small-time frame. Because it just meant that the market was saying I was wrong. So, I've learned through really tough periods where Dennis and I were seriously wrong. I was being told I was gonna ruin my career and there were a lot of tears at night on the couch and feeling awful about the stocks blowing up in my face. After you've weathered one of those situations for a few years, you learn that the scorecard is not necessarily settled, even if it's a longer duration and just sticking to the fundamentals. But I don't know what about you, Willy, are you looking at your stock every day?
Willy Walker: I don't. And I'll tell quickly my side of it. And then I want to hear from Dennis and how closely he follows the stocks that he writes on. I don't and as a couple people know, in 2017, I went away for a week and didn't have my phone. Came back from that week, not seeing Walker & Dunlop stock. And it was probably one of the best weeks I've ever had. My stress level went down dramatically. And I realized while I was gone, that previously I'd watch our stock. I come into the office have a really productive day, and the stock price would be down, and I'd feel bad about my performance. And I'd have a day that I did nothing, and the stock price would be up. And I felt like I accomplished a ton. It has nothing, no bearing on anything other than like a thumbs up, you look good today or thumbs down on Facebook, you didn't dress right. So, I gave it up. And to this day, I only check our stock price two days after earnings, and other than events like last week where we went over four billion in market cap. And I got inundated with lots of people saying congratulations, and that's all great and good. I don't watch it. And it is made a big difference. The only other piece to it that has been really fun is that our team, as you well know Ivy and Dennis, they redact our stock price from anything that I get to see. And so, what ends up happening is that the team goes to great lengths to not show me the stock price between quarters, but we're doing everything from stock plans to all sorts of stuff that needs to have the stock price there. Invariably I'll be in some meeting, and someone will blurt out where our stock price is and at least a couple of people in the room will go ashen and sort of thinking that someone has told me something I didn't want to hear and of course I hear it and just move on.
But anyway, how about you, Dennis as it relates to keeping track of the stocks that you all publish on?
Dennis McGill: I'm probably a little bit of the opposite of Ivy over time. Sometimes, she'll call me and say, have you seen what's going on today. And I may not have checked at all over the course of the day, but it's obviously in our job to understand what's happening. And you want to be mindful of our clients are dealing with it every day, and you're gonna get questions about what's happening. So, it's one of those data points you have to be on top of and you have to understand the trends. But ultimately, what we're thinking about or, I would think about more is, what are the market prices telling me. What's the information that I should be ingesting about how people are thinking about these stocks. What were the driving factors? And sometimes it means it's computers trading with computers and you're not learning much of anything. Other times you're learning something and, it might be something that's interpreted incorrectly. So, I think it's something where you have to your point. Over the longer term, it's gonna tell a much stronger story and the more you shorten that up, the more it just becomes noise. And if you get distracted too much by the noise, then you're gonna be taken off the real task of the day.
Ivy Zelman: I want to jump in Willy, because Dennis and I've been together for twenty-one years. He was a summer intern with me at Michigan. He's like the opposite of everybody. He's the academic brainiac that can be in front of the computer other than to get up and brush his teeth. So, he's the opposite of most people. We were all addicts watching the stock. I watched the 10-year yield more than I watch the equities. But Dennis is a unique breed in many ways. I would tell you, though to show you my addiction reflective is that my three children, whether they were with three, five and seven and Mama, maybe not three, five and seven, maybe five, seven, nine: Mom where the stocks green or red today? Because that could set my mood. They even knew Jeff Gundlach and Sam Zell was back in 2013 when everyone was saying that we were going to be wrong and home ownership is where rates were gonna plummet to 50 percent. They knew who Jeff Gundlach was. So, it was kind of funny.
Willy Walker: So in 2005, you both published Investors Gone Wild. You talk in your book, Ivy, a lot about the implications of publishing something that was so... I'll use a bunch of phrases, some of them don't even make sense, but counter cyclical, counter market, counter business, counterculture, counter career, counter everything, like at that time coming out and saying, housing is overbuilt and oversupplied. And we have a big comeuppance coming was very contrarian and you talk in great detail about the next two years of person after person, the nickname you got a Poison Ivy and all sorts of other things. And when the when the single-family market rebounded at the end of 2007, and you started to see lights of, basically your research saying we're gonna be right here. And then all of a sudden started to turn. And everyone's like, ah see, you weren't right. You were only right for a period of time. And here we go. I'd love to... I mean how did you make it through that period of time. There were so few people out there who made that call. The entire lending effect took everybody over the cliff, and you all stood out there and stood by your research. How did you do it?
Ivy Zelman: Oh, really the collaboration of the industry executives that were really keeping us aggressive about what was going in the market. You know, hearing stories where you're talking to a builder, who just lost in a bidding contest for buying large parcel of land, where he just couldn't pencil return. He'd asked the guy who bought it. Why did you buy it? It's crazy. How can you pay those numbers? He's like, I don't buy the land. I’m not gonna have a job. Or talking to a mortgage executive who just did a loan for someone who doesn't have a job, they just graduated college. And I’m like, how can you write them a loan? He’s like, “eh, Fannie & Freddie will buy it fast and easy.” You don't have to; they’re liar loans. And it was the constant interaction with the industry to then marry with the aggregation of our data that really was the combination and Dennis together. I mean we have many times we were on the phone and we're just whining to one another as well as the rest of our team. And it's the collaboration of our team. And recognizing that together, we would persevere and just sticking with it. And there were times where we would get pretty nervous. And when I was told by, the head of product management that I'm gonna ruin my career and I'm labeled a permabear, and I better upgrade the stocks. And I was like, Dennis, let's downgrade these damn stocks and we did. It took us like 10 minutes in December of ‘06. And we downgraded everything and reiterated our sell and we just like we are negative, or we were neutral and went to a reiterate to a sell recommendation. So, I don’t know Dennis if you have any fond memories of that period, but it was tough some days.
Dennis McGill: I remember a lot of conversations where your confidence gets shaken by going back to the stocks. You have a sparker that every day is telling you that you're potentially wrong. There's a lot of public commentary suggesting that you're wrong and people are reading from the market, right? Home prices were incredibly strong. Inventories were incredibly low. There were calls of very strong demographics at that time. People talking about a 70% home ownership rate from where we were.
So, all of these different signals that are out there, and you have to just come back to the work that you're doing. If you're not doing your own proprietary work, you can be reshaped by all of that very quickly. It's really hard to fight that crowd. But when you are doing your own proprietary work and you can anchor around something. Every time we have the conversation, maybe we are wrong, maybe we should think of it. Maybe we should just be a little bit more positive. It would make us more popular. It would get us back to being ranked number one. All those different things but then you sit there and say, but how could you do that? Because you'd have to spin the data in an entirely incorrect way just to feed a message that you don't believe in. And so, it was that conviction that you ultimately had to have in your own work. I think it was one of the more amazing things from that time period, because among our clients who were taking that same position and believed in it they had to hold that position for quite a while before it actually turned positive.
And in the real world of managing money where you manage or recognize on a quarterly basis to do that it takes so much confidence and endurance. And the guys, John Paulson’s of the world and Steve Eiseman, not only did they have the confidence to sustain their view, but even after it started to make money and you started to prove the worth to go for five billion of profit after you had one billion or two billion or three billion. That's really impressive. It's that conviction that I think we ultimately had and that the pride that I take in it is not so much to say we were negative, and it ended up falling apart, but it was the whys. What were the reasons why we were negative? The concerns around the mortgage lending. The affordability issues and the exuberance that was out there. If you can go back in history and look at what we wrote, I take a lot of pride in the fact that we were there for the right reasons as well.
Ivy Zelman: Well said.
Willy Walker: So obviously, being on the research side, you all have significant limitations on where you can invest. But you're sitting here for a two-year period saying this thing is gonna fall apart to a few voices in the market doing it. Did you get to take positions in anything that would allow you to take advantage of your insight into a market that was about to fall apart?
Ivy Zelman: As one of our biggest regrets, personally, both my myself and my husband, but we'll say we didn't because we had rules around, we couldn't own or be involved in the stocks that we covered. It seemed risky to me. And I don't look good in orange, so I always kind of stay down the lane in the middle of the lane and don't do anything that could be even borderline. But I can say that the one thing that came to fruition is we started Zelman. So, we did actually figure out a way to monetize it. Maybe not exactly the way I would have liked, but I think, I don't know, Dennis, did you play any of the ways to take advantage?
Dennis McGill: No, I wish I did. But I remember reading a book on John Paulson and some of the work that they were doing at the time. One of the points they made was that home prices never go down was what everybody was saying at that time. And that supported the comments in the marketplace. Some of the work that we had done was adjusting that for inflation realizing that on a real basis, they've gone down multiple times. There was a chart that one of the analysts at Paulson had pulled together and showed it to John Paulson said, “Look, this is home price inflation adjusted, it does go down.” That was not the crux of the call, but that was a big part of why they were so confident. I remember talking to Ivy after and I said wow, if only we needed something so simple as that, I knew we could trade these vehicles to monetize it. We would have been all over it. But we are so focused on our own research and work and everything that we were doing with. I don't even think that's where our brain was going at the time.
Willy Walker: It's absolutely fascinating because you all, Ivy, you pointed out in the book, I mean you all were right there with the Paulson’s of the world and everybody who got it right. And we've all read, and all seen how difficult it was for them to both hold their positions while the market was soaring and everyone saying you're wrong, you are wrong, you are wrong, and then to turn around and then hold the positions when they started to get into the money. As Dennis you accurately say, when you got into a billion of gains, and all of a sudden, it's well, let's hold a little bit longer and you get to three and you get to five. It's just unbelievable. But it is sort of, unfortunately, you guys couldn't…
Ivy Zelman: take advantage.
Willy Walker: Yeah, exactly. So, let's fast forward now to the most recent research you all put out, because I think that if you go back to 2005 and the Investors Gone Wild and that two-year period there, where everyone said, no, markets are great. Everything's gonna be perfect. Ivy, you point out in your book, a couple of people said to you land value never goes down. And it's like, yeah, it actually does go down. Over long term it may not, but in the short-term period, it certainly can go down and quite quite dramatically.
And so, you all just published something in your Cradle to Grave report that what I would call a recently bearish outlook on the U.S. housing market. And it's really underpinned by the demographics of our country and the fact that birth rates have fallen dramatically, and we don't have the type of immigration that we used to have. And those two things, there's a line Dennis that you write in it that says, “housing is defenseless against slowing demographics.” And I love that. It's sort of like you can't do anything about this one. Housing is defenseless on this one. You want to dive in for a moment on sort of the major tenants of what you're seeing that made you all come out with that report?
Ivy Zelman: Yeah, Dennis is the demographer. I think that there's no question, I would point out just for everyone listening there was other thematic pieces that really separated us from everyone else as well, because the piece we did called Wonderland and that was in October ‘06, we published where we talked about the builders actually writing off land which was unheard of. We actually estimated that they would write off 20% of their overall land values. We were really wrong because it was almost 60%. But when we said it to your point and land couldn't go down, or we did a report called Mortgage Liquidity du jour, Underestimated No More. So, part of this Zelman platform is really about continuation of thematic pieces that will really shine a light on what's happening and critical to the future of the housing market. So, Dennis is the genius. He doesn't get as much visibility as I do, but he's the brainiac. And we just have unbelievable, the benefits of his just aggregation of data and intelligence. So, take it away, Dennis, you are the man.
Dennis McGill: The other thing also, I think just to connect those dots from that period to today, we've written a lot of very optimistic things over the last ten years plus of being independent firm and very focused on the entry level, housing market in 2014, 2015 and the reversal of mortgage credit in 2014. The last time we took this deep dive on demographics, as an example, was in 2013. And the title was Total Demographic Spring, because we were arguing that there were a lot of cyclical effects that were going to unwind and putting that together with just normal population growth and so forth, that we saw a big tail wind to the market overall. So, we are willing to be on both sides of the conversation and I think what spurred us to publish Cradle to Grave is something that we've been thinking about and incorporating into our bigger picture thought process for a while. But just get it into a singular report. And really analyze a lot of these things because you have not only the market has taken off of late. And so, you have a lot of people extrapolating near term trends. But you also have this pandemic period just really reshaped how everybody is living and thinking about things. So, the 2020 decennial census coming out was sort of gravy on it all because you get a new set of data. But it really gives you an opportunity to take a step back and say the pandemic has created all kinds of distortions around housing. We're all aware and we can get into some of them in more detail. But we are going to be left with who are underlying demographic demand when the dust settles, and that dust is settling sooner rather than later. And to understand the core demographics, it's really about how much the population can grow and then that inferred down to household formation and how much house formation grow.
And the reality of it is even before you talk about the forecast is, household formations been falling for decades. We are not growing the way we've grown historically. And if you don't grow the population, you don't grow households, you don't need incremental housing demand and supply. So, as we look at it, just very simplicity, you're at this point where fertility rates are under pressure. That's been a multiyear phenomenon now, really, since 2007. We've had the baby boomers aging, able to survive, able to save a lot of this over time. But they're now moving into their older years. And death rates are going to climb every year or death, I should say deaths. The number of deaths gonna continue to climb for the foreseeable future. By our math, by the end of this decade, the organic population growth of the country will be negative, for the first time ever. You can look at a country like Japan that has gone through this with about a twenty-year lead time. It's an aging population and fertility rates falling. Their population growth domestically went negative in 2005, it's been negative every year since and it's gonna be a negative every year for as far as you can see. So, you kind of know how this is going to play out on the demographic side between births and deaths. The question is, are we free how many...
Ivy Zelman: Housing starts in Japan, they're down from that time, even when the population hadn't yet been under pressure, we saw housing starts down significantly.
Dennis McGill: Yeah, you can kind of tie this to the supply side here, but end of the day, we're on a slowing trajectory. That is ultimately what matters for housing demand.
Willy Walker: As I hear that, the sort of the counter side to that, I want to say is, oh, immigration is gonna save us (35:34), Dennis, that I got it, the fertility rates are down. And I've got a slide here just that I'll share quickly to allow people to take a look at the slide that you have inside the report that does show that post GFC slide in birth rates in the United States. And it's pretty dramatic. And so, I mean anyone who wants to kind of look at real data to back up what you just said, look no further than that slide.
Dennis McGill: Right. Absolutely.
The thing is that this is not unique to the U.S. This is happening globally and a lot of the factors that have impacted it it's hard to argue that they're going to reverse. So, urbanization is a big part of it, rural population shifting to suburban and urban population, that's absolutely happening in this country. One thing we talked about coming out of the 2020 data that no one really references is we had over 50% of the counties in this country have seen their population decline over the last ten years. Outright decline. A lot of that is shifting to suburban areas and urban areas. But what also happens when you shift population from rural to urban and suburban is you tend to have fewer children. You tend to be more educated, tend to live at home a little bit longer because you're not getting married, not having children. All of those things collectively tend to pressure fertility rates over time. We've seen it play out in every other developed nation across the globe. It's happening here as well. And once it happens, it's very hard to reverse. So, we can all sit back and hope that whether it's the other side of the pandemic or better economy, or what have you that fertility rates are gonna reverse, it would go against everything that you've seen in other countries and would go against the education of females. It would go against all of the things that were seeing on young adults living at home longer.
Ivy Zelman: As well to your point though Willy, about immigration, recognizing that is a way to solve the declining population because immigration today though, and we look at legal immigrants coming into the country. 2020 was a fraction of what it had been pretty... prior to Covid, but the numbers aren't reversing and in 2021, maybe they will. But that if we can get both sides of the aisle to agree that the immigrants are actually going to do allow for us to have an economy that can thrive, then maybe we would have a more positive outlook, but that is the solution.
Dennis McGill: And we talk about that as an option, because that's the big difference between us and Japan. If we want to look at the demographics of the organic population, we can tell you with pretty good certainty what's gonna happen. We know people are gonna age, and we have a pretty good sense on fertility rates aren't gonna reverse. So, it all comes down to immigration. Japan doesn't have much immigration. Here, if we open the borders, we have way more demand then we're allowing supply for immigration. But if you put a policy in place that was an economic policy of immigration and one that was to prevent a decline in population, it helps everything. It helps everything from a housing standpoint, certainly would help some of the labor bottlenecks, and it would drive economic growth. You could carry this conversation from housing to the broader economy as well. A shrinking population is not going to be good for overall GDP growth. So, we really should be thinking about immigration from an economic standpoint, and there's gonna be social elements to it. But if you approach it from an economic standpoint, there's a lot of this that you can hold. And more people is gonna mean more housing from a growth standpoint.
Willy Walker: Has that economic message found its way to predominantly republican senators and governors across the sun belt who should be understanding what the long-term implications are to their states, to their populations, to our rural economy, if we don't get growth through immigration?
Dennis McGill: I don't think so, because just based on the conversation we've had coming out of this report from various people, I don't think that many people are focused on this at all. And even executives that have read the report and look at the cadence. Sometimes you get the reaction is, okay, so what you're telling me is kind of a longer-term problem, but I can still keep building today and everything is okay for the next couple of years. Is that what I’m reading? So, it's almost finding the silver lining of, okay, we’ll worry about this tomorrow.
Willy Walker: But do that… So then give that because I mean you talk about the seeds of oversupply are being planted today. The direct question of that is okay, great! I don't see that seed; I don’t see that small tree for quite some time. Certainly doesn't provide shade for me for a very long period of time. So, what's the time period we're talking about here?
Dennis McGill: Right. That's right. And in the normalized demand that we get to running through all these population and demographic things is about a million a year. That's household formation over the next ten years as we see it, normalized household formation. Then you have to add on to that about 350,000 units for incremental vacancies and obsolescence replacement. So, what we're really saying is you need to build about somewhere between 1.3-1.4 million per year. If you look at completions today, so what's actually hitting the market for the consumer to see, that's about where you're at. 1.4 million maybe a touch above when you bring in manufactured housing. But when you look at permits and starts, that pace is closer to 1.7 million. And based on all the research we're doing, all the commentary in the marketplace about a shortage, all the confidence that’s out there, all the capital that's out there, the yield chasing that's out there, I bet a lot of money that 1.7 is going higher and the near term versus lower.
If you're already have a pipeline and a backlog that's running above where you think mid cycle should be, you think that's only gonna continue to increase over the next couple of years. Then every step higher is a seed that you're planting of oversupply. And the...
Ivy Zelman: We hear a lot, sorry to interrupt, Dennis. The feedback we get is that, well, it's happening in the blue states. That's where household growth is slowing. Population is slowing. It's not a problem in Texas. It's not a problem in Arizona and Nevada and certainly not in Florida, and in Carolinas. And I'll let Dennis give his response, but you know, it's all about your household growth might be better than, let's say, Ohio. But how much supply are you bringing to market? Because it feels like the one thing I could say in 30 years of following housing market, is that everybody wants to be in the same states. But Dennis, why don't you elaborate a little bit of it. That's our biggest rebuttal or things that we hear from people. Well, it's not really happening in the market I’m operating in.
Dennis McGill: Right. The point we've tried to make with the Japan analogy, even looking at slow states here in the U.S. that have struggled to grow for the last three, four, five decades, is that as you shrink the population or you grow at a slower pace, the incremental supply you need to bring to market is less than what you brought historically. So, if somebody's looking at housing starts going back to 1970, or total housing supply and saying that's the long-term average and we need to get back to that because we “under-built last decade”, then you're looking at the wrong math because you're looking at historical demographics that aren't true any longer that don't really matter in the grand scheme of things. Whether you're looking at that nationally or you're looking at that across different states, it's the same argument. If you look at household formation this past decade by state, and compare that to the prior decades, it's 25% lower across the country. There are only six states that are better and two of those states, New York, and Massachusetts, no one would have ever guessed.
So even if you throw out the 1970s, which were really high growth, you're about 15% below this last decade from where you were. And even in high growth states that people talk about like Arizona, Nevada, and North Carolina, etc., are about 10%+. No matter how you frame it, whichever area you are looking at, if you're using history as your guide to what we think supply needs to be, you're gonna overshoot. The other way of thinking about this just pulling some numbers together for this few you go back to the 2000 and 2010 period. So, the strongest household growth by state was in Arizona, Nevada, Idaho, Texas, and Utah, I think, was Utah. So, of those five, guess how much home prices went down peak to trough in those five states? 40% on average. So, you could have sat there, and all day long said and gotten the demand side right. Say, let me pick the five fastest growing areas of the country and just build there. But when everybody does that, it's a supply question as well. That's my feedback.
Willy Walker: But your peak to trough there. Your peak to trough there is 2005 to 2007. So, if your 2000 to 2010 number is actually a positive number, correct?
Dennis McGill: No, you probably know. You probably trick the trough closer to home prices probably didn't trough to 2010.
Willy Walker: Okay, because of the lag effect. I got it yeah. Okay.
Dennis McGill: Right. So that's the harder part. You could sit here, and I think, put a lot of math behind what you think the demand should be in these different areas. And without question that demand is gonna be stronger in the areas of the country that are growing faster. I don't think anybody's debating that Texas and Florida and North Carolina area grow faster than Ohio, Michigan, and New York.
But at the same time, if everybody knows that, and if everybody's investing that way, then the big question is, how much supply are you gonna bring? That's where this really comes into play because I think a lot of analyses are anchored in the confidence of well we have a housing shortage and I know there's a lot of strong demand from in those states. So, what's the risk of over building today?
Ivy Zelman: The other thing Willy is just thinking about whether it be the biggest funds that have raised a tremendous amount of capital. They're looking at the Resi asset class and saying that's the best opportunity relative to any other opportunity. And by the way, I’m promising a double-digit levered return to the people I just raised money from. And you need to put that money to work. So, where should we go? And you see it whether it being the build for rent strategy that we really liked until everybody's going to Phoenix and everybody's going to, Houston and Dallas. And it's kind of like, you see all of this development that's in the pipeline. And you're like where all these bodies gonna come from. And right now, investors are very prevalent in the marketplace again. Whether it be private investors, institutional investors, I mean just the competitive nature of the market. And second home ownership. I don't know about you, Willy, but I have more than one home and I think there’s a lot of people that were concerned about being in dense markets. They decided that you know what, I'm gonna go in the suburbs of the tri-state area for example. I'm gonna go buy a house, but I might also have a house in Florida as well. Or I'm currently in a rental, I'm in a single-family rental home. And I'm waiting for my house to be built. So, there's like dual home ownership or dual properties and in people's lives today. Therefore, you can't really delineate what is true demand. And at some point, investors are not like as sticky as a primary owner who's gonna stay around. If rates go up, the cost of capital goes up, the stock market corrects what happens to all the investors? And that's when you start to see home prices crack. Or you don't get the lease ups that you expect. Or you don't sell the spec units that you built. What do you do? Well, you got to monetize, you got to pay those investors. So, you're going to sell and you're going to do what you can to move your inventory to monetize, which then puts pressure in those zip codes, where everybody is concentrated. That's what we're seeing right now, a lot of concentration risk.
Willy Walker: Dennis, I read something this week as it relates to New York office leasing. One of the comments was that One Vanderbilt, which is the building that were in in New York, is leased up and getting premium rates. And premium leases and it's all great because it's new inventory, it's a brand-new building and somewhere everyone wants to be. But it is in about three other buildings are the only ones that are getting that New York and the rest of the office stock in New York is trading very, very poorly. As it relates to housing, is there's something to be said that as the net worth of the American homeowner, the American citizen has inflated so much during the pandemic that there's gonna be a continued desire to have new and that the real problem is gonna be in old?
Dennis McGill: I don't know. I think it depends, because one, I think there's obviously different classes have benefited during the pandemic. Right? Depends how much assets you own, probably of how good you’re feeling about the pandemic treated you. But I think the challenge with that is typically old is in the areas of the suburbs that are maybe higher school districts, better amenities, things that in some cases are a better lifestyle. So unfortunately, builders, whether they be for sale or for rent, often have to go to the areas that are more undeveloped to find the land, to actually build the amount of units they want.
So, in some cases, you have to sacrifice location for new. If you're talking about urban infill type or suburban infill where it's knocked down rebuild, I could certainly say that market continuing to remain strong. But a lot of the conversation, even this goes back to the demand side is, you know, there is an affordability component to this, and there is an aspect of what people want and what they can afford on a monthly basis don't always match up. I think that's gonna be a challenge as well as you look forward, as much as home prices have gone up. The idealist would be, there's lots more we can build, and hopefully people can then have a better house, better lifestyle that they're in, but it is gonna come down to the income side.
Willy Walker: And, so given the data points we're all seeing, you know this week Real Page came out and said that apartment absorption in Q3 was the highest it's ever been. 255,000 units were absorbed in Q3. Rents across the board for all the public apartment REITs up double digits in Q3. And we'll see them all report in the next couple of days, but we all know that they're getting 11, 13% rent increases. So, when you have that kind of 1/4 million units absorbed. And double digit rent increases back to what you said, Ivy, capital says I want into that market.
So as people sit there, now, I mean there's clearly opportunity to be made today. And money to be made today on investing in the housing sector, whether single family BFR|SFR or in multi. So given the backdrop in the context of the arc that you and Dennis put out there as it relates to where demographics are going. How do people play this market?
Ivy Zelman: I think we always know real estate is so localized. So, it's really the competitive landscape within where they're operating. And I think that all of the typical things we look at, job growth, the number of new units coming to market. So, it's difficult to, say for instance, Boise is a hot housing market like beyond hot. And now we have several new builders. The public builders have entered Idaho that had never operated there before. I was on the phone with a builder in Wisconsin. And I was speaking at the university of Wisconsin, so I want to do some homework. They're telling me Lennar is now in the market. So, in some markets there, where maybe the growth is not as robust as the call it red states, there is not as much competition. So, it's a lot to do with competition and appreciating that you might be in Alabama and the publics aren't there. And you know what? The publics don't play nice in the sandbox, because if they're developing and they need to monetize and turn, and they're going to do so in a more aggressive way. So, I feel like it's just understanding the supply demand dynamics, underpinnings of employment in those markets. Right now, pretty much every market's been very, very strong.
So, if you're a builder operator, I would just say to you, maybe stay away from Phoenix because everybody's in Phoenix. That's like the capital of all central to investing today. And it always has been. You know Phoenix has been a very volatile market. Austin is really a market that seems, it's frothy is to say the word correctly. And there are other markets where there's no build-for-rent. Why not go to some of the blue states where no one else is operating? And I think that it's the sheep mentality go against the grain, go the opposite way, and find opportunities where you don't have the competitive pressure. I don't know Dennis if you want to jump in and say anything else.
Dennis McGill: I look at this a little differently, too in those multifamily stats would match up with some of the data that we're getting out of our survey that we do each month where occupancy over the last three months, and we've been doing it for over ten years there. It's the highest of any period we've seen. But at the same time, delinquency and collection rates are poor and much worse than what we've seen. So, if you adjust for and think of it as economic occupancy, what you're collecting, occupancy would actually be down versus where it was in 2019.
And you just think about all the distortions that are out there in the market from the pandemic where you've got eviction moratoriums, foreclosure moratoriums. You don't have to pay your student loans. You got a tremendous amount of money that was sent from the government to every household. The unemployment, extended unemployment benefits. All of these things have distorted the normal market, and they're all fading away. So, you are gonna have to be left with real income growth, real financial circumstances for people. You just look at some of the things and go back to where we were before the pandemic. We weren't all talking about five or six, eight million housing unit shortage. Home prices were gonna have their worst year since 2011. Not bad, but it was gonna be 4% growth. You think about rent growth was decelerating before the pandemic. What's happened since then? We have fewer people employee. We have more deaths which took more households out of the market. We have less immigration which brought fewer people into the market. All of the things that drive primary demand have actually gotten worse through the pandemic.
So why should we be so confident that the pandemic bump is now the new level that we extrapolate from? It actually seems like a very risky thing to extrapolate from. And to your original question, how do we think about it, how do we utilize it? It's very hard to time, but whether you're an investor or you're an operator, just think about it where risk management, where are you in the cycle? If you knew you were later cycle, you'd probably take different risks. Then if you knew you were in the middle of cycle, early cycle. I think what we're ultimately saying is if you're looking at pandemic activity, you're probably later cycle.
Willy Walker: So on the right. sorry, go ahead, sorry.
Ivy Zelman: I should say that many operators that I speak with are pre-selling any development to mitigate their risk. That way they.. you know to me, that seems like a great strategy. If you're a merchant builder and you've pre-sold it while you're in development, Kudos to you. But duration right now. If we think the housing market could start to be impacted by a higher cost of capital, higher taxes, a lot of the things that the payback for all the stimulus and all of the death that we've taken on as a nation, that pay it back. I don't know when the Fed is gonna start tapering. I call J Pal, the bartender serving an over-served crowd that at some point the drunk does pass out. So, when we can't really figure that out, exactly, but you just have to... We talk to people in your business, and they will tell you it's nuts. They know it's nuts, but they have to keep putting the money to work. So how do you mitigate the risk? That's one strategy pre-sell everything you're developing.
Willy Walker: And in the... So, if we look at this and kind of going back to 2005, your report at that time was really focused, mostly on the supply of single-family housing. But then clearly, clearly clearly clearly on the lending side, things started to really start to show up. You made the comment, Ivy, relates to fake loans and robo-signing and things of that nature that came into the market. And we really started to see in 2006, 2007.
From a lending standpoint, are either of you seeing anything in the markets today that make you take pause in what's happening? Most lenders out there doing 5-, 7-, 10-year term loans. It's one thing for a developer buyer today to say, hey, I’m not gonna listen to that for today, because there's an opportunity for me to either build and sell before the curtain closes, if you will, or I can trade in and out before this window closes on me. But on the lending side, you're putting out of 5-, 7-, 10-year loan. How do you both feel about the lending markets today as it relates to both single-family and multifamily?
Ivy Zelman: Dennis you want to start, and I'll jump in?
Dennis McGill: I think you can pretty confidently say that the mortgage underwriting quality is extremely high today. And not even comparable to what was happening at that time, partly because of human guidelines for restricted, but part of it is there's just so many buyers, a lot of times you can cherry pick your buyer in some cases. But if you said, is there abundant capital availability today, like there was then? That certainly a strong parallel. I think the other aspect of if we're looking for the same boogeyman that's got in the market every other time, you're probably gonna miss the true driver of what's out there. It's not going to repeat itself exactly.
The way I kind of think about it is demand is gonna be what it is. That's gonna materialize without any of us having any impact on it. If the question is, how do developers interpret that to be? How sustainable is it? How much do you want to extrapolate? That's why we go back to trying to understand what's happening in the pandemic. What was happening back then, was you had a lot of demand that was not primary demand. But if the developers thought it was primary demand, then it gave him confidence to build. As the economist told him, the demographics are good and homeownership rates are going up, then that's all they needed to hear. And if people are looking at today's demand environment and saying, that's true, that's telling me something I need to go build. Then that's what's gonna happen. So, it might not the overbuilding can happen for different reasons and typically does happen for different reasons. I think we're all gonna wait around for the next mortgage bubble before we have to be worried, we're gonna be waiting a while. It's something else that's going to probably snatch the market.
Ivy Zelman: But to your point, Willy, the leverage within development, construction lending and overall development, there's not concerns around the amount of leverage. I mean we have developers are some cases as high as 50% equity to 70% LTV. So that's not really the risk. What's the risk? The risk is that the returns aren't going to be there. Can you really say that rent roles are gonna be blended at 7%? I mean how are you underwriting this? What are your assumptions when you're acquiring and or developing? And you know what Jonathan Gray said, it's a great time to sell. You and I both have an unbelievable amount of respect for Jonathan. And I think that people that are willing to go against the grain and recognize that I might not get this exactly right. But I should probably start to be thinking about maybe a little bit more of a risk off strategy.
And when we talk to the build for rent guys, there's...you know, I can't imagine how many conversations some of our industry contacts have had with perspective build for rent partnerships, and anyone… I can't tell you the hedge funds I talk to, I get a call once a week from a build for rent operator. A lot of them are going out there developing, and they're raising debt funds from high-net-worth individuals. And these are not highly levered, but these investors expect a return. So, it's about not achieving those returns, and then what? Are they really long-term investors, Willy? Are they really gonna stick around when they have empty houses they can't lease up? And then what do they do? They sell to the for-sale market and or the for-sale guys, by the way, are gonna be selling to the build for rent guys, because that's great counter cyclical way to monetize for them. And they're speculating right now because the supply chains are absolutely insane. And the bottlenecks are real, and the inflation is massive.
So, as you start to think about all the speculative inventory coming to market, I would put the build for rent in somewhat speculative. They're not doing leasing up before they develop. So, we have a lot of shelter and a lot of markets that could arguably start competing against one another. So again, it's about appreciating that leverage is not the problem. It's the returns that are gonna matter. And then people are gonna want their money back. Because you and I know Willy, if we were invested in a fund and we didn't get paid, we wouldn't be happy.
Willy Walker: Right. So, I could keep going with the two of you, and yet again, this time actually my notes, I’m good Ivy. I still have a couple more questions I get to. So, I’m gonna run out of time on this one. But the question I asked you last time we were together, Ivy on the webcast, if you had to put $1 into single-family, BFR|SFR or multi, last time you said BFR|SFR. Are you...You have to put that dollar to work, you can't hold on to it, so you got to put it somewhere. You put in single, BFR|SFR or multi?
Ivy Zelman: I would be buying an existing product to renovate. I think that the age of the stock United States that's over 45 years old and much older east of the Mississippi needs refurbishment. And I think that the renovation market will remain very robust. I would be investing in companies that are exposed to repair and model in Resi.
We think about the fact that today, my biggest concern is, as the Fed may start tapering very shortly. And that's the head wind. We certainly are going to see rates higher. People are going to be disincentivized to move. I mean we look every day at the number of people that are locked in below 4%, thirty years fixed rates. And right now, that's 2/3, roughly, of the Americans that have a mortgage. At the end of 18, it was 39%. Just even looking at those that are below 3.75% was 54%. So, what happens to that person that to have a tremendous amount of equity appreciation in their existing home? And they're gonna say, no, I'm not gonna move, I can't transfer that mortgage rate, but I'm gonna fix up the house. I'm gonna put in a new kitchen,. I'm gonna put in a new bathroom. Let's redo the basement. So, I think that's where the money is to be made. And the fix and flip market is a great market for those that want to stay to Dennis' point closer to into the job market suburbia and urban.
Willy Walker: Dennis?
Dennis McGill: So I would probably go a little bit of a different, but I agree with Ivy. But I think urban multifamily is a bit counter intuitive at this point. But so much of what we've talked about is intertwined, which is somewhat new. Typically, you had the over build of single-family in the early 2000s, but multifamily really wasn't at that time. And then things sort of reversed last decade. You got everybody wrong into the same tune right now. So, I think there's gonna be a lot of this is going to impact all the sectors. But if you had said on a relative basis, urban multifamily is kind of paid their price. You pulled a lot of suburban, a lot of people out to the suburbs, older people that would have potentially bought 2, 3 years later, pulled them out early. You've had to replenish that with younger tenants, which isn't the best trade to make right now. But you may be taking it on the chin already there. And then you look at where the supply is coming. Clearly, all the single-family for sale and for rent is in suburbs, and even multifamily permits are skewing heavily to the suburbs now.
So, you roll out twelve, eighteen months, twenty-four months, supply picture might not be as onerous in the urban side. If you believe the demographic side where you have young people continue to stay young longer, you're gonna continue to see that migration to urban areas, especially among the educated.
Willy Walker: So that will be the final word. To my two friends, colleagues, which is really fun from you to say as well as partners. It's a real joy and honor to have both Ivy and Dennis join me today.
Ivy, your book is a fantastic read, and I am greatly appreciative for you sharing your personal story and all that you have gone through to be as successful a mother and friend and family member and professional that you have been and all the things that made you the person you are. So, to anyone who is not read Gimme Shelter. You can download it on your Kindle like I did and read it really quickly. Or you can wait. I don't know when you're coming out with your audio book, Ivy, but I know you're recording it this week. So, it's gonna be out soon enough. Anyway, it's a fantastic read to anyone who hasn't read it, pick it up. And thank you both for joining me. Hope everyone found this conversation to be engaging and stimulating.
Have a great day and we will be back next week with John Rice, of Management Leadership for Tomorrow. Thanks, everyone have a great day.
Dennis McGill: Thank you, Willy.
Willy Walker: See you.