Willy Walker:
Good morning, everyone, and welcome to A) the Zelman housing conference, B) a live Walker Webcast, well it's actually not live. We're recording it and we’ll play it next week. And welcome to hopefully, a really good, engaging conversation with Sean Dobson on where the markets are—single-family, SFR, multi-family— from someone who has A) timed markets impeccably in the past, has an incredible mind as it relates to both financing line housing and actually the building and management of housing, and I would say, behind me, Sean, just an incredible perspective as it relates to trading in these markets.
I thought a lot about where to start this morning. I would start here. The Fed raised by 25 basis points yesterday. Other than the fact that the cost of capital just went up, what's your take on that raise and what that does, either from a price stability standpoint, if you listen to Fed Chair Warsh, or a broader view, as I just said, on CNBC, which is after raising by a quarter point, I didn't see the memo come in from the Iranians that the Strait of Hormuz is now open and the oil is going to drop by 25 bucks a barrel.
Sean Dobson:
Diesel didn't get cut there, but we're going to see.
Willy Walker:
I'm sort of like, what are we trying to accomplish here by raising by 25 basis points?
Sean Dobson:
Well, thank you, guys, for having me. As far as interest rates, you might not be able to understand our business. We're an investment manager, co-investor, kind of merchant investor, and most of our investment programs are 10, 15, 20 year programs. The next month, the next week, the next year, it's always hard for anyone to forecast. I don't think we have any special expertise that anyone else doesn't have. In terms of the short term, we think that in terms of the overall economy and what the Fed's trying to do, we think they're late, and they've been late for about seven or eight years. I think they were very late in taking away the subsidies post the financial crisis by a long time, so they kept rates too low for too long.
And then when COVID came around, they kind of had a chance to let things settle back in and did it, and then they over-eased and kept them really at a level that's never seen before in terms of interest rates relative to economic activity. And when you do that, housing, what we're all talking about today, takes the brunt of those mistakes in both monetary policy and fiscal policy. I think that raising rates today is fighting inflation that was caused a couple of years ago, and we don't need to keep inflating it.
I think the bigger, you mentioned cost of capital, I think what I'd like to say is kind of the yellow blinking check engine light that we're all kind of whistling past every day is that if you take a look at the return on tips, it's way too high. And that just means that America's cost of capital has gone up about 100 to 150 basis points, which is a lot. As a nation, our cost of capital is now at a level that's going to hurt growth and economy, and raising the nominal rate is not going to help us.
Willy Walker:
You made a lot of money and a lot of good bets around the GFC. Anything you're saying
Sean Dobson:
I didn't keep it, so I'm still here working on it.
Willy Walker:
It's all good. It's Sean. Anything you're seeing today that is a similar setup to the big bet you made on the GFC?
Sean Dobson:
I mean, I tell people that the problem with finding something as big as the mispricing of mortgage credit points that we found in 2004, 2005, is that you spend the rest of your career looking for another one. And it may have been an accident that we found it in the first place, and there may never be another one. I would say that if you simplify the ingredients to what happened in the GFC, the primary cause of home prices getting out of control was Greenspan lowering interest rates into a growing economy. This was lowering interest rates because of the .com bust, which was way more contained than they thought it was going to be, while PCE and consumer spending at the other point of the rate stayed just fine on a macro basis.
What happens in the United States is when consumers are making generally more money every year in nominal dollars, and you crash down long-term interest rates, their buying power for housing goes up quickly, and it goes up way faster than the rest of us can respond to varying houses for those buyers who now have incremental buying power because mortgage rates drop so fast.
Now, if mortgage rates are dropping at the same time the economy is shrinking, then you don't get this explosion you get when you lower mortgage rates into an increasing economy. That's what's happened post-COVID, is that we dropped interest rates into a growing economy. When it's finally okay to criticize the government for their response to COVID, the economists I think will conclude that the monetary response was ridiculously too large. And the fiscal response was ridiculously too large.
And we did that at the same time, which means that the government printed and literally gave away money at the same time that long-term interest rates were held at 2-3% over a long time. When those things happen, what happens is the buying power for housing goes way up, and the economy tries to react; the system tries to react more supply. It really just drives the prices. When you have that big of a stimulus from demand, it just drives prices up.
Willy Walker:
But it sounds like in the GFC, you only had the fiscal side that caused the problem. On this one, you've got both the fiscal and the monetary. Why is this not a bigger trend than the GFC?
Sean Dobson:
Well, on the metric, the model that told us to short the housing market in 2005 thinks that home prices are more expensive today than they were in 2005-2006. Relative to and your homebuilders talk about the low end that's hard to supply to, it's not because there aren't a lot of people that make $80,000 a year who would like to buy a nice home. It's because people that make $80,000 a year can't get a mortgage big enough to buy a nice home.
On a pure affordability perspective, you would say that today is the best time ever to short the housing market. The problem with that theory, the reason we're not recommending that, as a matter of fact, we're recommending the opposite, is that you have to keep up with the supply and demand, and you have to keep up with this float of housing versus stock, and that's the issue. What was unique about the financial crisis wasn't so much that home prices had overrun fair value. What was unique is they were all temporarily financed. There was a capitalist decree, a glut of supply. The capitalist was just that the user of payday was going to expire; the adjustable-rate mortgage was going to reset the number we had in the pay option mortgage where you didn't even have to pay the interest. All the tricks to get the monthly payment to be small relative to the long hours had temporary features to them. And so you could just forecast when the music was going to stop.
Now it took a long time. They were short in 2005, 2006, and whatever else is ever going to happen. You don't have that catalyst today. You have a third catalyst of, of 3 million, 4 million, 5 million new for sale homes in the market.
As a matter of fact, you have the opposite. We kept, when I talk about the mistakes, and it's easy for me to say I've never had, will be, I've never had, but what I like to think about is in retrospect, COVID was never going to be a 30-year problem. It was never going to be a 10-year problem. It was either going to be the Spanish flu, in which case 30%, 35% of the population was going to die in a matter of 18 to 24 months, or it was going to be what it was, a non-event. We took long-term interest rates to 3%. We took mortgage rates to 3% on 30 years of trade mortgages. But we did that. Not only did we create more buying power per unit of monthly payment that manifests itself into asset price inflation, we took those homes off the market for a long time. I'd say it's the 10th amount to burn them down.
We talk about the supply of housing. There are 4 million under-built, 3 million under-built, and yes, they're under-built, but the real issue is not so much how many homes there are, it's how many homes are tradable. Like what's the, not the stock of number of homes out there, but the float of homes that are freely tradable.
And freely tradable means a couple of things. It means that the mortgage is less than the value, so there's equity. And it means that the cost for the seller to transfer to a new home isn't prohibitively expensive. And so we talk about the lock-in effect, and we've been writing about it for 5 years, and I've probably been writing about it a couple of times since interest rates went up. But I think that it's, you can't almost overstate the impact it has on keeping home prices unsustainably high. So, we think housing is a technical short. Household prices are high for technical reasons, not because of fundamental reasons. Technical price squeezes break because of a catalyst, and we don't think that catalyst is going to happen.
Willy Walker:
So, I want to come back to that in a moment, but I want to dive in for a moment. You had that short on your back in 6 and 7. What, A, you just talked about a number of different data points that got you to put that position on. There wasn't one yellow blinking light that said that's the one piece to it. But once you put it on, to maintain the conviction, to see it out, there have been almost daily moments where you said, oh, why do we have this thing on, and this isn't going to actually happen.
Sean Dobson:
People thought we were crazy. We thought we were crazy. There's this crazy bond convention that happens every year in Florida, and it's like a convention that tends to disturb, like, I don't know, anybody who would have in the industry. Where literally different law firms and investment banks set up booths, and you walk around, and you talk to people. It's a crazy thing to ever see. And everyone competes to hand out the best chopsticks and keep changing it for the better. In 2005, one thing that we handed out to people was a hard hat that said Amherst on the front, on the back, and it said we were appalling home prices.
People really thought we were out of our minds. Like, home prices have been locking them up, really, since 1997, 1998. And there was nothing on our eyes.
By the end of 2006, when that conference came back around, home prices had to go down. It was, what are we, wait, there's an election? We need to change the politics. I didn't know what an election was. But I think that for us to stick with the trade deal, two things happened. One is that our first trade deal was terrible. We got short bonds that were trading 300 over, and the reason they were trading 200 over. We smoked 30%. But I think that what we're really betting on was that, as capitalists, we could see that by 2006, 2007, the consumers in the homes couldn't afford the payment that they had already signed up for.
You didn't have to have, like, some weird thing happen. You just had to have time pass. Really, what interests me, when home prices in 2006 underperformed inflation, we tripled everything. The reason we were losing money is because easier credit was supporting higher home prices, and the new loan paid off the old dumb loan. And so you make a dumber loan and a dumber loan to pay off the previous dumb loan, and it doesn't look like you can make any more dumb loans. They're all geniuses. But when home prices kind of capped out, it meant that there was no cash-out refi to pay off the last dumb loan. That's where the cover-up was referred to.
Willy Walker:
It's funny, you talk about the new dumb loan, you pay off the old dumb loan. When they announced the bond-buying program, they were going out and buying bonded securities and issuing traded securities to do so. It reminded me of back in CBS days when they used to take a B-rated bond and put it with a B-rated bond, and miraculously it became an A-rated bond. It was sort of like, how does this actually work?
You talked about what happens to stock and burning it down. One of the reasons you started your single-family rental business was you were looking at the market in 2010, 2011, and saying, we had a kind of permanent dislocation in single-family space. There needs to be a new pulse for rent, but there's also all this inventory out there that's just sitting there as if it had been burned down. It wasn't being used. It wasn't capable of being bought.
Talk about that moment and the focus of you and your team, Sean, on how you entered the SFR space.
Sean Dobson:
Well, it looks better now than it did at the time.
Willy Walker:
I have just one quick side to that. I was with Sam Zell back in 2011 or 2012, and John Schreiber from Blackstone showed up at this conference that we were both at. And Schreiber had a column where he was sitting there talking about the single-family rental idea they had. And Sam, in typical Sam fashion, stands up and goes, that's the stupidest fucking idea I've ever had. And he looks at everyone in the room, and he goes, has anyone in this room ever washed a rental car? And of course, nobody in the room raises their hand and says, that's exactly it.
These people are going to come to rent these homes. They're going to drive them to the ground. You're not going to be able to take care of them. And maybe it's going to be a huge cost. That's a terrible idea. And lo and behold, John Schreiber and Blackstone did pretty well at SFR.
Sean Dobson:
He wasn't totally wrong. We started out with a—well, how we got into the business was our inverse customer base are maybe the 300 largest investors in the world. And we work with them on their U.S. Residential exposure. And with these types of accounts, whether you're a sovereign wealth fund or you're a global life company or whatever, you're paying these huge holes of capital; they need to move in scale. A 1% position, because that's a lot of zeros. And they need something that's going to last a long time. These are not pools of capital that are like hedge funds running through this quarter, that quarter. They're mostly either not-for-profit or taxpayer money most of the time. And they're investing from 2030 or into their lifetimes. They lean on us. We lean on them for big things. U.S. housing.
U.S. housing is the largest private market in the world. It's almost the same scale as the whole S&P, the whole stock market combined. And it's very liquid. When you get back to housing, when it crashed, you had 7 million homes in mortgages in the fall, in home prices in the pre-fall. We looked around, and there were a bunch of things to do in the registry. You could buy bonds that were mispriced. Every mortgage bank was busted. The banks were busted. There were lots of things like junk investing you could do, sorting the baby off the bathwater. But we sat back and said, well, let me get something that really fits our customer base and really is designed around the long term. And what we decided, and it was genius, is that the $2 trillion lost in mortgages was probably going to be a pretty big lesson for lenders. And they were just not going to wait back to give you mortgages to people who had less than pristine credit.
And that meant that there was forever going to be a new customer in the housing market that was going to be—and it was a function of—and that's happened. There's been almost no subprime origination to speak of in terms of what it was in, say, 2001, ‘02, ‘03 before the boom times. It's maybe a third or less of what it was before. That is the whole view, is that the houses are there. We can probably operate them as a commercial estate. The customers are there. And when people look at the rental industry historically, the customer base was sort of the—it's kind of the one minus of the homebuyer customer base. It was a fairly hard customer to manage because it was a customer that couldn't get a subprime mortgage.
That was the thesis, that the customer quality was going up. The home price had crashed. And the returns were high. And we thought we could operate it. And our original strategy was all outsourced operations. We took a lot of lessons from the people that buy default mortgages and work them out through their vendor networks. The GSEs have big vendor networks that repair homes and manage homes. And so we had this big idea to go buy hundreds of thousands of homes, operate their terminals, and package them up to investors the same way that we did for the last 25 years in the mortgage market, providing them a sort of turnkey investment for the large investor that they buy through their books, and everything happens the way a mortgageable works.
Willy Walker:
But you moved into—you basically vertically integrated that business. You went from really being a trading house and hedge fund to being an actual owner and operator of a vertically integrated SFR business.
Sean Dobson:
The word might be. We have to. What happened is you could find—a lot of people know this. A lot of the mortgage prices were fraud. A lot of people you might know by now lied about their income. The most common fraud was really for the purpose of the mortgage. They didn't say the real thing there. They actually were SFR operators. A huge chunk of the mortgages that defaulted in the financial crisis were speculators who owned 15, 20 homes.
Those speculators had an ecosystem of real estate agents, leasing agents, and property managers that would help them manage their portfolio. We tried to leverage all that. And what you found is just this—and you see this today. You guys are going to talk about single-family or residential housing companies. You break out single-family from multifamily. The multifamily ecosystem is this super professional ecosystem, everything from design to build to manage to price. And they think long-term, how am I going to put the carpet in that doesn't wear out in the turns? While single-family—and I love these—the guys are built to do an amazing job, given the fact that they have. But those same decisions are not made in any part of the single-family ecosystem. Their average hold period for all of them is six months. And they're multifamily developers developing for 15, 20 years. We ran into that in operations. All the thinking was short-term. They couldn't spell or know why. They were not compliant with fair housing. There were all kinds of problems in the ecosystem. We just said, this isn't scalable. It's not compliant. It's not fair. It doesn't have the reputations or protections that we would require. So we built them from the ground up. And that's why the United States is the greatest economy on the planet, because you could build them from the ground up.
Willy Walker:
And so today you have $100,000?
Sean Dobson:
50,000 homes. And it was just way under-performed expectations. If you look at the—there's four or five million missing subprime mortgages post-GFC that should have originated. And that's benchmarked to, like, way pre-GFC credit standards. There's been five million families that have been told no to buying a home that we think should have been told yes. Those five million families are out there in rentals. And we only have 50,000 homes. The industry is having a very difficult time growing.
Willy Walker:
Why?
Sean Dobson:
Cost of capital in the beginning. This was assets that were priced by the investors as if it was way riskier than it really is. It took a long time to get market acceptance on the price. Then we just had a series of calamities here. I mean, COVID was a big issue. It hurt the industry dramatically. And a lot of the pushback for growth was this narrative, this narrative that SMR is a bad thing, private equity is a bad thing, private equity in housing is a bad thing. And that really limited the investor base.
And this investor base started out with sort of adventurous speculator types who would put a very small allocation to see if you could operate the thing.
And it took us five or six or seven years to answer the question: Is this a business, or is this a trade? Can you operate it? And now you guys are going to hear it from Jessica. She runs our operator. We run as tight as a ship, as your investment will be on the operator, so you can't operate. In those five years, growth was slow because the cost of capital was really, really high.
As the cost of capital came down, you could expand a little bit more, but then we ran into the interest rate spike. And we ran into COVID, then we ran into this interest rate spike. Those two things have really been heavy headwinds against the industry getting to where it will eventually be, which is part of the housing ecosystem, a solution between the two-bedroom apartment and the three-bedroom home you own. And it will lay next to, in the portfolio, lay next to securitized structured products and scale. But it's hard to start a new industry.
Willy Walker:
I worked with some treasury officials yesterday, and as I was walking into the conference room, they said, do you want to talk about the road and the housing act and SFR and BFR? And I said, we can talk about that, but I'm not here to actually talk about that specifically. And they were like, okay, because if you are, we've got to bring in a whole other team of people.
And so as we were going through the meeting, I sat there and said, so what's your take? I'm asking them the question, what's your take as it relates to the qualified institutions as it relates to the sale and purchase of SFR communities? And I said to them, my friend Dallas Tanner, who runs Invitation Homes, says it's all up to the rulemaking. And literally all three people I was meeting were smiling, going, did he pay you to say that? And I said, no, he didn't pay me to say that.
But what's your take on the Road and Housing Act and what headings that present for you all as it relates to growing the portfolio or the value of your existing portfolio given potential constraints for rulemaking.
Sean Dobson:
This has been the last six months of my life as a part-time lobbyist.
Willy Walker:
I think everyone in your industry has become a part-time lobbyist.
Sean Dobson:
We've all been. We're all very consumed from the whole mess.
Willy Walker:
Do you think that at the end of the day, the Senate bill was a train wreck? The House bill worked out the case in the Senate bill. Obviously, it's got that rulemaking there. Are you okay with the legislation?
Sean Dobson:
I think that everyone, including French Hill and other senior grownups in D.C., and there are some grownups left in D.C., realized that a bunch of people are about to lose housing. They're about to lose their opportunity for housing. And French Hill really saved the day.
Again, to put an old person's head in French Hill. I've never heard of French Hill.
Willy Walker:
I know him quite well. He's an exceptional leader of the House Management Services Committee.
Sean Dobson:
The guys I know are his vintage, and his demeanor are eating intros from D.C. It's kind of upsetting. But anyway, I think it landed in a fine place. I would have given a choice of or no . I'd rather have no . Given the choice of the thing that the Senate was trying, the original bill was ridiculous. This one has meaningful exceptions that allow us to serve those 5 million families that the mortgage market holds. That's just 5 million since the GFC.
We can still buy or renovate. You can build a new BTR, which we have some of that business. You can renovate a home. It just means that you have to make sure that you're really renovating homes. You're not just competing with the West for the ready-to-go home that consumers can buy.
There's exceptions for homes that are operated with real path-to-ownership programs in place, which we're implementing. I think it's fine. I think there's a silver lining around it. It's that it does create a standard that didn't exist before. The industry has something to point to that says the government's looked at this. They've determined what they like and didn't like, and they've given us a way that they approve us to do business before we were kind of operating in kind of a . I think that's the best fit. The exceptions are well-written, well-structured. And yes, the rulemaking will clarify some vague portions of the exceptions, but it can't change them.
The way the law is structured, if you own an existing pool of homes, you're carved in as a permanent exception, and those homes are carved in as exceptions. There's an argument that the existing SFR portfolios are kind of after Bitcoin, a little flavor to them, because it's really hard to create a scaling portfolio.
Willy Walker:
And so it's a little bit of regulatory capture.
Sean Dobson:
Maybe. We'll see. Some of the exceptions are going to lag the road. I honestly don't think—kind of the ironic thing is we weren't buying homes anyway because the post-COVID price had got so high. The return on expectation has kind of gotten all of our targets.
They banned us from doing something that no one was always doing anyway. But the exceptions may be broad enough that it's not regulatory capture, that you can still grow.
Willy Walker:
And so as it relates to that, how can a portfolio—is there anything here that is super beneficial to you as it relates to gaining scale? In other words, you've got that exception. You and others.
Sean Dobson:
Well, this exception we're talking about, carved in the homes that you own pre the law passed. That's just about 550,000 doors that will carry this sort of unique identifier.
But there are other ways to get homes to happen without people that are pretty—that are not super hard. They're pretty consistent documents anyway. I think that when investors go to look at their risk tolerance, their regulatory risk tolerance, they're going to say—some of the investors are going to say, I read that exception, but if I read it wrong, it's a million-dollar fine every time I read it wrong. I don't want to rely on that exception. The one about executive inventory is easy. There's almost no risk to that exception. Some investors would want to pay a premium on that. But I mean, it's hard to say how much.
Willy Walker:
You started building this portfolio back in ‘11, and we're now in ‘26. It's been 15 years. During that period of time, given trade on the single-family side, opportunities on the multifamily side, you've decided to stay in the SFR space.
Why no additional bets on the single-family side or the multifamily side?
Sean Dobson:
We have had a decent business on the credit side for a while. We've wound down a bunch of those positions. The single-family thing, it is a belief, and we could be wrong, but it's a belief that this is a new sector that will be larger than almost all the commercials they could buy.
Us single-family guys kind of look at the CRE space as coins. When I sold my investment bank to Banco Cent there, and we're just a little investment bank you've never heard of, we were buying and selling about $50 billion a month worth of real estate debt.
In the RESI space, there's $9 trillion of UPB outstanding adversity mortgages. I think it's a $55 trillion market cap for single-family homes. We think that having the ecosystem that allows a large investor to responsibly deploy capital in scale into an asset class that big is a remarkable thing to have. And there's really only four or five of these things that exist in terms of acquisition, development, property management, financing, portfolio optimization. We made the bet that single-family homes will be more rented in the future than they were in the past. And we built the entire ecosystem that the multi-family housing sector has across multiple partners.
And when I say the sector, I'm thinking about everything from someone that develops land, to a securitization issuer, to a fund manager. That whole ecosystem. For a single-family, we have all of that. We're buying raw land and turning it into built-to-rent. On one side, we're out doing the glamorous things of fixing air conditioners and toilets on the land and handling our own—we internalize 65% or 70% of the service calls on our portfolio on that end. On the other end, we issue our own securitizations. We generate our own funds, run our own funds in a more flexible order.
It's kind of cool to think that you're at the beginning of something that in 10-15 years will just be out. There's the office space, there's the multi-family space, but there's this giant sector out here that really represents a core inflation-protected position. We're trying not to say it clearly, but the U.S. consumer, their largest expense is housing, as you know. The largest chunk of that is in single-family. It's not like part of any other thing in the economy.
Willy Walker:
Double-click on the moment there about your inflation-protected investment. I was with somebody yesterday who's trying to raise a fund, a multi-family fund, and they're taking off for a trip to Asia next week. And they said it was hard enough to try and attract investments in U.S. commercial real estate before we had rates go to where they are, and now that we have rates where they are, it's super difficult for us to go raise capital to come in and invest in a billion and a half dollar multi-family investment fund. But you just hit on a point that I think is super important from an overall return standpoint.
Sean Dobson:
It's hard to sell to traditional real estate investors when the cap rate is below the financing cost. It's like, I've got enough surveys of the people I've seen that they're kicking into. They want to have a high ROE, assuming no revenue growth, and then they want the revenue growth. It's good work if you can get it. But most of the time, when that cap rate is that far above your financing costs, the fair bet is that your revenue is going down, not up in the future.
Today, when you have cap rates this far below or equal to or this far below financing costs, you have to wonder, is it a fair bet that your revenue growth is going to peak up for that deficit? And we believe it's kind of a very easy bet on the rental side that the revenue growth will go up based on inflation from here. And it's a lot of the dynamics we just talked about. Rental growth has been not great, but steady over the last three years, during a point in time when all the built-to-rent stuff came on the market, all the multi-family stuff hit the market. You have all this migration going on. And now that whole supply cut is drying up, and it's going to really dry up now. Diesel fuel is $6 a gallon, and interest rates are this high. The demand for rentals will be higher.
But remember, these programs are going to be 10, 15 years or 20 years.
If you study the revenue side of residential real estate for the last 50, 60 years, we think the study is kind of fun. We're like, what other thing can you buy instead of housing that produces the same risk-adjusted revenue? And the only sectors of the S&P 500 come close are tobacco, alcohol, and caffeine.
They're the only people that have the pricing power. Coca-Cola, tobacco companies, beer companies, and of course the alcohol guys are in trouble now. But over time, recession, growth, and if you go look at those revenue streams, you look at housing revenue streams, they're very, very similar in terms of durability and ability to reprice when inflation goes up.
The difference is that our housing portfolios, multi-family and single-family, are running 67% margins. Those other companies run 15, 20, 30% margins, which means that as you have inflation, their revenue inflates, but so do their expenses. For us, our expenses go up, but there's such a small share of our revenue that you can really turbocharge the inflation into the investment side.
The good news is that the lower going-in yields are not really an issue because they compare very favorably to other things that are inflation-protected. The kind of bad news for single-families is that it's not risky enough. When it lies in the private equity allocation of a pension fund, that money is laid over there to earn 15% or something. Housing has pricing power like a financial channel. It's really like a five-year ticket. It's really what I can think about.
If the home prices move 4 or 5%, who makes the news? You can't have an asset with a 5% price fall and a 15% return from this. I mean, that would be amazing, but it's not the case.
We think you can easily underwrite single-family revenue to be inflation plus 6 year in, year out, over decades. The house we build is more durable than the house that the homebuilders build. The house that we renovated is renovated to look more like a multi-family than single-family. We run it like a multi-family. And we think that over time, people will start to figure out that there's almost no reason to own a bond if you can own a big, diversified portfolio of residential estate at low-income bills that are anywhere close to where bonds are yielding. Because one, you get the yield plus inflation. One, you get the yield minus inflation. And the long-term benefit to our government is not going to become less oriented to create inflation.
Willy Walker:
You just said it's not risky enough. You can make it riskier.
Sean Dobson:
You can leverage it, but it's like, that's all just going to be like tiny functions. You can make it riskier for a 4 or 5-year function. You can't. And I think that's a problem the industry is going to have, actually, with our securitization firms for 5 years, and they should be 15 years. There's a bunch of this debt that's going to roll, and people are going to have to figure out how to deal with that, with how much our interest rates are.
Willy Walker:
Does that deter your role, concern you, Sean?
Sean Dobson:
I mean, everyone's looking at it. I doubt it. We're pretty edged against it. But the debt markets have been incredible. We issued a securitization right before the ; well, it was before it became law and after it was published, at our tightest nominal spread to be issued today in our eyes of industry. The debt markets have been just incredible. They're incredibly flexible on allowing us to issue securities at a discount when the pay rate needs to come down so that we can prevent interest. I'm not too worried about it. I would way prefer longer-term mortgages because it's such a low-ball, long-dated asset.
Willy Walker:
And as it relates to spreads, given the panning of the wall of securities and that much paper coming out of the market, you've got to expect that spreads are going to gap out.
Sean Dobson:
I don't know.
Willy Walker:
I thought you were going to say yes indefinitely there. No, I didn't mean that. I want to know why.
Sean Dobson:
Well, if you look at the issuance of fixed income, where the money, where the issuance of fixed income is coming from, and if you want a big book, right, there's only so much data center exporter you can take. There's only so much U.S. Office exporter you can take. And remember those 5 million families that were told not to buy a home? That's 5 million mortgages that investors didn't get to invest in. There's an enormous hole out there in the debt cap markets for this asset class that is unallocated to them. I don't think this particular asset class looks particularly tight on a multibillion basis. I think if anything, high-rate fixed income is a little bit wide relative to inflation. I think that's the biggest issue. Like I was saying, the Treasury bills are sort of inflation plus 2.5. It used to be inflation plus 1. During COVID, there was inflation minus 1. Like that 100, 150 days' worth of tax that every bond has in it is the problem.
I think that overall, spreads don't look crazy tight given how strong the economy is.
Now, $6 a gallon diesel fuel, we have the Fed raising rates, fighting inflation from 2 years ago. They can mess this up. And the U.S. economy is very fragile. It can be messed up. The key number that we've been—there's a bunch of numbers to look at. We watch our rent collections every month like crazy.
It's like unemployment Friday every first of the month to see how our customers are behaving. And they've been proven incredibly resilient.
Our rent-taker ratios are in the low 20s. And our velocity of rents is—our velocity of homes is—Jessica's team puts 2,000 or 3,000 homes up for rent every month, and they rent 40 percent of them in the first 30 days. Fifty percent of them are way different from multi-billion-dollar homes. We don't think the economy deserves a higher credit spread. This is a short answer. The quantum of capital that's being borrowed may move nominal rates in the direction of growth. But the credit risk in the U.S. economy is not there yet.
Willy Walker:
But with that as the backdrop, Sean, we've got plenty of debt capital. We've got 5 million previous subprime homeowners who need to live in a single-family rental. All the backdrop sounds like that's perfect. Why not go buy like 50,000 homes? And the capital is out there for it. If this is low leverage—
Sean Dobson:
At its peak, our platform was buying half a million dollars of homes a month. And Jessica and our construction team were in their 20s. It's only been in big homes for 60 to 90 days. It's hard to run a business at that scale with that many small trades. The reason we're not running that phase today is primarily our belief that we'll get a better entry point. And if we get a better entry point, either more clear rent growth that you're not sort of having to look so far through the fog to see it, or a better entry point in cost of building.
Willy Walker:
Go down and out. Cost of build or cost of buy?
Sean Dobson:
Cost of build. The cost of buying is tough because there's just nothing for sale. The for-sale inventory is off. It's still 35 or 40% from pre-COVID times. The flow of housing is difficult.
Cost of build. We're investing heavily in our factory to do off-site construction. We build a regular IRC code home, not a manufacturer home, the way Capco does, which is pretty cool. It would be awesome to see them be able to stretch more into something that's a permanent home. And it will stretch more into something that looks like a home as well. There are efficiencies to be gained in that cost.
There's efficiencies to be gained there in required margin in that business. One of the things we all talk about with homebuilders is we see their 20, 25% gross margins. Like, there was this other question about AI. Like, the question for AI really would be, can AI run the rest of the company so efficiently that you don't need a 25 percent gross margin to build a home?
Willy Walker:
On one of the slides that I showed previously was basically the deaths in America versus the births in America, and we're going negative on that one. And there are a ton of homes where, if you will, the owners are no longer alive, and therefore that's coming back into the inventory. We talked previously about the lock-in effect on mortgages and what that's done. Would any of that, sort of, if you will, older inventory be back into the rental pool? Would you go out and try to buy those homes? Because clearly you're not going to buy homes from ULT and Lennar. But would you go out and buy that excess inventory?
Sean Dobson:
We would. And the main thesis following our offsite construction is basically that. This doesn't tie in one-for-one, but throughout the South, if you start at Sherman and you whip all the way around to maybe as far west as Dallas or Houston, what you'll see is that—
Willy Walker:
That's kind of our sweet spot.
Sean Dobson:
That's kind of where people are moving to is where their mother's better at the taxes.
Willy Walker:
You've stopped in Dallas. You don't complete the smile over in Seattle.
Sean Dobson:
We have homes all the way up to Seattle, but really those markets are so hard to, it's like, the friction points for supply are important. In that smile, you can build. And I think this is the part that surprised people about home price appreciation in the last four or five years. They're way lower in the smile than they are in the place. It's because when people moved, migrated to those areas, those local governments built it so the supply showed up to meet that demand. That's what's going on.
But I think that there's a chunk of house inventory that's just coming to get a much more useful life. And you can go see it. And it's in great locations, but it is on big lots, but they're very small homes, and there are millions of them. And there are homes built in the 40s, 50s, and early 60s. Those need to come down. And what needs to go back is this missing little concept that people always talk about, something that's either a five to four to seven unit multi-family thing or two or three homes on micro-flag plots. I think that we're spending a lot of time on that, because I think that's this urban infill trade where the local governments are in favor of density. We don't do a lot of bills for it because we can't get comfortable with the locations and the times. You're kind of underwriting it like this because you can see the home; people want to live down the highway 15 minutes, and they're willing to pay $1.50 a foot to live down there. But you're 15 minutes further from the grocery store. You're 15 minutes further from work. And those risks don't fully translate.
In this urban infill thing, you don't have that risk. But the risk you have is that you can't go through 200 doors with one construction co-assistant. The way that the big builders do it. Where they've got one person that does 10 accommodations, another team that's 10 frames, another team that's 10 rooms. That doesn't work. You can't build one over here, one over there.
This one starts in January; that one starts in March. You have to use the offsite strategy.
Willy Walker:
And it sounds like you're more focused on high growth as it relates to migration and outgrowth and employment growth than you are on supply constraint markets.
Sean Dobson:
I remember the length of these programs. I would say, I knew you were going to ask me a question about where, and it's so much easier for us to figure out where not.
Willy Walker:
All right, give us the where not.
Sean Dobson:
The where-nots, I'm going to have a stock answer, but the where-nots are price. California, for a myriad of reasons, you just, unless you're going to live there and enjoy it, I don't know how in the world you buy a piece of real estate in California. It's the most beautiful state property in the union, but the most difficult to do business in by far. California is out basically because of price.
Willy Walker:
Just one quick aside to California. I just read a research report by a firm called 13D that puts out really interesting research, and this was on El Niño and the fact that 2026 will go down as the hottest year they were doing back; I don't know how they did this, but they said it's a top five hot year of the last 125,000 years.
Okay, so I'm not exactly sure how they did that. 1,250 years ago, but anyway, they basically were talking about how hot it is, and then they were going forward to this coming El Niño year and what it could mean to moisture levels in the state of California and some incredible destruction that could come into California if you have one of these. I don’t think it’s called—but it's like this: if you have a big river in the sky, it comes through the damage that could happen in the state of California, and it was a pretty scary report. California, you're not touching it.
Sean Dobson:
California, the market dynamics there between local governments not wanting you to build, the people want to live within three miles of the ocean. It's an incredible economy with lots of wealthy people, so there's plenty of demand for high prices, so California's just kind of off the table. Illinois is off the table. The level of state deficits there are going to show up on property or in books at some point, so you just can't figure it out. There are places like the East Coast where the combination of density, product type, and local regulations just make it very difficult to operate at scale. Like Pittsburgh is a really cool town actually, an awesome place, but nearly impossible to scale up more fully.
Willy Walker:
What about the DMV district in Maryland and Virginia?
Sean Dobson:
We tried hard to be in Northeastern Virginia and just couldn't figure it out; just couldn't figure out operations; just couldn't figure out costs. Our core business is static sites, single-family rental, and you need to have pretty easy access to trades, so those unions, those markets that are heavily union-dependent, like when you work in there, the union doesn't provide the services that you need, so you end up with kind of a mess. The local government is super important.
Even in, like St. Louis, there are cities, because we say we invest in St. Louis, but we don't invest in a bunch of cities around St. Louis. There are some cities that are just off limits because the city government, it's just not profitable; they won't issue permits, they won't give you a CLO out of principle. You find that more common kind of in the Midwest, and then bending around to kind of the New York area.
And that's tough because those are huge populations. If you just mark off 25 or 30% of the United States, it's your headcount.
Willy Walker:
Anything here? Do you like Boston?
Sean Dobson:
Price. I love Boston. But, whenever you get a G coefficient, like you have in Boston, or like you have in California, you find that, we serve the middle American family; we serve a family that makes $110,000 a year; they're paying 25% of their income in rent; it's incredibly affordable. Our rents are $1.40 a foot a month. But that family has a reason; like 85% of them have a reason they're not buyers. And it's not because they don't want to be. The 50% don't want to be. 85% would like to own a home. And they either don't have the kind of family that you think about. Maybe they're not married, maybe there are two sets of kids in there, maybe they're just roommates. Maybe it's a single mom with some kids. And kind of a factoid for you is, like, but all this revolves back to is that the mortgage market doesn't serve the market. And the mortgage market is still looking for the Cleavers. And there are a lot of families that don't look like the Cleavers.
Willy Walker:
Do you think that the view on housing is a store of value and an appreciable asset that's fundamentally changed this next generation of Americans?
Sean Dobson:
I think we don't talk about this enough because it's one of these things that happens that everyone needs a home to go home, and you've got to own a home. But what I like to say is that if we were regulated by a federal brokerage, it's like the SEC of the small firms. And there's all this trading when you talk to a customer about giving them financial advice, which we had to take the trading. And then they go sell it to us online.
But like if your cousin came to you and said, my financial advisor said I should take 80% of my equity and I should go borrow then another four times that. And I should invest in one asset in one quarter on one street, in one city, in one state, you'd say fire that financial advisor. Say, what in the world are you doing? And that's what we sort of expect our young families that are forming today to do is to go get completely illiquid, completely levered up, and take a bet on that one asset in one location.
Willy Walker:
I love those people as an employee.
Sean Dobson:
Exactly. But I think that when we got this idea of the American dream, and you need to own a home, and you're going to have your 3.2 children, your other investment choices were very different. The cost to invest was very high.
There were still people calling up and selling their stocks. The risk of investing was outrageous. If you took a look at the balance sheet of a family that was 35 years old, you probably wouldn't allocate them something in this scale that has a 5% risk to it, that has a 5% fall. You would try to get them all up through leverage.
Now, there's a societal benefit for people to think and act like owners in their community and in their neighborhood, and do they wash their car, or not wash their car. And all of those are true. But I would tell you for the families, that it will be called our—we say the words “our families” a lot, like the families in our homes. They are not to be disrespected. I had to sit in Washington, D.C., and say this over and over again. And I was told by our lecturers at Fresher to stop talking about your residents, and no one cares. And this whole discussion around the , every time I said hold them, the argument is I bought the house, and now they get it.
The government gives me grants of 28% mortgages in this country, and they will not finance my families. What you're really saying is you don't want those people living in those homes. If you're going to say that, at least have the guts to stand up behind your lecturer when you're running for campaign and say I don't want people to look like that, living in homes that look like that, because that's the policy you're actually advocating.
And I've got to tell you, it really didn't. They really didn't understand that. I think that this idea of ownership is 100% correct. I think that our argument that somehow our families are hurting the neighborhood is completely uninformed. I can tell you that we have people that have been in our homes for 2 years, 3 years, 5 years, 7 years, 8 years. Their homes have looked a lot better than some of my family's homes in terms of how they carry on. They act and think like it's their home. And that's what we tell them is the difference. It's like we buy a house, and they make a home. And the fact that our neighborhood compares is interesting, but I've got to tell you, the average American family that's sitting out there today, particularly our families, like, here's a factoid for you that you may not know. When you get divorced, only one person gets the bike or scooter. There's a lot of single moms out there who have no credit score, and they're not getting the mortgage. They're living in their homes. Does this whole conversation about how much equity does she need to have in her home, and what's her portfolio application and is it better than her own home? Seriously. She's got a couple of kids; she's got in school. She's a nurse. Right now, she lives in a 3-bedroom home. She has a place where her kids are safe in school. Domino's delivers. Domino's doesn't deliver to every house in the United States. We put her in a home in a suburb where she has no other way to live. In terms of these bigger ideals of like, should you call their homes, I make almost all my money in the mortgage market.
I feel like I've contributed more to homeownership than probably anybody in the home. And I'm all for us doing everything we can to increase access to homeownership. And that means more subprime mortgages. But to act like we're ever going to get above 63% or 64% homeownership rate is ludicrous.
Willy Walker:
That was where I was going.
Sean Dobson:
We got to 69%. It’s got a whole—the other third.
Willy Walker:
But it wasn't. I mean, it was fiscal and monetary policy that got us there, not homeownership society that got us there.
Sean Dobson:
No. You made it super easy to go buy a home for 10 or 12 years. And you just look, it's not complicated. You've added much demand to a market that can't create supply. You're going to change the price. And the interesting thing is that, I spent a lot of my time in four countries; they just are mesmerized by a 30-year fixed-rate mortgage.
And then the 30-year fixed rate, what I tell people is you don't really want to buy a house. What you really want to get is a 30-year fixed-rate mortgage. Because that's the most inflation-protected thing you can do. But that 30-year fixed-rate mortgage basically transfers those mistakes in monetary policy directly to buy the asset and locks it up for years. Now, not for 30 years. The turnover rate, I was looking at it yesterday. The largest cohort of mortgages that trade in America are up. There's $700 billion worth of 30-year tunes. The bondholders get paid a tune. And they're prepaid at about a 5% per annum rate. 12, 14 years, that group of homes will turn over. And so that's the give and take of the 30 mortgages of wealth-creating machines for American consumers.
The counter-anecdote is you have to be very careful with how low you let that rate go because you can create these big discontinuities between affordability for the people who don't own it and the price that the people have to own it.
Willy Walker:
So, final things. First, the wealth transfer is coming up as those bloopers are coming up.
Sean Dobson:
I love that slide as well with the $90 trillion.
Willy Walker:
$90 trillion. And I've heard it being a little bit pretty mad. It's a huge amount of money. Does that present headwinds on the SFR side versus the buy side?
Sean Dobson:
I don't know. I don't know. What I thought was fascinating about that is that there's $45 trillion in debt on the government's balance sheets that that same generation may have left us. So, like, we've been paying half of it down.
But I think that we spend a lot of time talking about the impacts of longevity on the housing market. On the one hand, we talk about the fact that we've lived through the most amazing time for longevity of any generation in the last 300 years, maybe 200 years.
Willy Walker:
I've seen chunks that we can't. I mean, come on.
Sean Dobson:
Well, the gains are there. But I'd say, like, in my lifetime—this happened in my father's lifetime. My father was born in 1937. Life expectancy is 63 years. He's still with us. He'll be 89 this year.
Willy Walker:
Exactly the same as my father.
Sean Dobson:
He's the smartest guy in the room to this day. My son was born in 2003. Life expectancy is 86 years. You're like, okay, what does that mean? Well, it's 23 years, almost 63 days. I mean, we're going on. We made these human machines almost 50% longer. What does that mean?
Willy Walker:
But you've got to think that it accelerates.
Sean Dobson:
Well, it will accelerate. If you look at that population pyramid that I was talking about, the impact of the acceleration. Well, it's not accelerating. But it is happening. We're not going to make it. But the big gains are probably going to be big. Someone born today is probably not going to get the same 20, the same 50-year expansion, 40-year expansion as my dad.
Willy Walker:
I just had my COO get his hip replaced and get me back on my bike in like five days.
Sean Dobson:
Yeah, it's fast. But when you get to housing, like what does it mean for housing? It means several things. It means that this whole reaction to like, oh, my God, first-time homebuyers are 40 years old. There must be something on the housing market. It's completely misguided. Because today's 40-year-old is not the 40-year-old from 1965.
Today's 40-year-old is going to look beyond. We do this funny stat that if you looked at first-time homebuyers, not by the age they bought but by the life expectancy they have when they buy it, it hasn't moved in like 50 years.
Same thing with marriages, by the way. What this has to do is the housing system has been suffering because the older generation has been keeping their houses way longer than expected. And the younger generation is putting off marriage and kids and housing way longer than we would expect all the time. And so everything has been pulled. But that pull is kind of like coming to like the baby boomers, or probably not really.
Willy Walker:
Final thing. You'd be really good at looking for that flashing yellow light. We've talked about the national debt. We've talked about mortgage rates. We've talked about demography. We've talked about migration trends. What's the thing that you and your team are watching right now that says we're long SFR? We like this asset class. We like where we sit. But we would revise that bet if X happened.
Sean Dobson:
Well, I think if we thought that there was—well, I would say the biggest blinking light now is the risk of stagflation. And stagflation is just a destroyer of wealth for almost whoever you are. And if the Fed keeps trying to fight three years ago's inflation, they run a notice of stagflation. This is because oil prices go up, interest rates go up, incomes go down. That's probably the—if there was a 4% chance of this two years ago, that's tripled. That's kind of the biggest concern is are we going to drive the cost of capital at the same time we drive down the economy?
And we keep looking closely for, like, how does this war, how does oil, how does a larger and larger government, a larger and larger federal deficit, all do those things sort of conspire to bring down GDP and drive inflation. The biggest thing we all think about right now with rates going up is we are actually going to have a recession. Or if you don't anticipate that recession, it's going to be super, super difficult.
Willy Walker:
The flip side to that is that a recession would actually be good for housing because we'd probably get rates coming down.
Sean Dobson:
You would get new recessions as well. New recessions can be good, but like recessions need lower rates. If you get rates going down, but as we talked about before, there's so much demand on the debt dollar. And we talked about, like, the spreads coming. The reason spreads are tight is because nominal rates are going up. If the U.S. government keeps printing deficits at this level, you could have a recession at higher rates. But that's the problem.
That's the biggest problem. And so it's not just as much SFR. I mean, everything is less than we almost thought. I'd say that's the biggest reason.
Willy Walker:
But you've got that 12% chance right now.
Sean Dobson:
It's not that high, but it's one of these things where it's high enough that you have to be intentional.
Willy Walker:
Sean, thank you so much for your time. Thank you, everybody.
Sean Dobson:
Thank you guys.
