Eric Finnigan Unravels Housing Market Dynamics Amidst Demographic Shifts and Remote Work Trends

Unlock the mysteries of the housing market with Eric Finnigan, our esteemed guest and VP of Research at John Burns Research and Consulting. This episode peels back the layers of how immigration, the “lock-in” effect, and our shifting work culture are reshaping where we live and invest. Eric, a seasoned expert who's weathered the storm since the 2007 financial crisis, breaks down the economic tango between homeowner decisions and market fluctuations. Engage with us as we parse through the entangled web of homeowners clinging to low mortgage rates, regional inventory shifts, and how the convenience of remote work is influencing the American dream of homeownership.

Then, we tackle the looming "silver tsunami," sifting through the facts and fiction about the anticipated wave of homes flooding the market as baby boomers pass on. Eric provides a fresh perspective on the generational battle for housing, evaluating the financial prowess of boomers and the impact of their decisions on market dynamics. We also zoom in on the home builders' crusade against zoning and development challenges in their mission to bridge the 2 million-unit housing gap. By the episode's end, you'll have gained a robust understanding of the economic forces at play and the potential directions in which the housing market could pivot, grounded in the wisdom and foresight of a distinguished market watcher.

Nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. 

The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.

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Transcript

Speaker 1: 0:08

My name is Michael Gaya, joining me for the 45-minute time period. Here is Eric Finnegan. Eric, I appreciate your time Very interesting to the audience and to me. Who are you, what's your background, what have you done throughout your career and what are you doing here early?

Speaker 2: 0:19

Yeah sure, hey, michael, glad to be on here. So my name is Eric Finnegan. I am currently a VP of Research focusing on demographics at John Burns Research and Consulting. I've been covering the housing market since 2007. I remember my first week on the job was the first time that Ben Bernanke had injected emergency liquidity into the financial system as it was cratering. So I got a really upfront view of the last housing crash and been covering it ever since. So I've had positions at independent consulting firms, research firms and then also with a capital allocator in New York City. I've been with John Burns about two and a half years now.

Speaker 1: 1:01

Since you mentioned the emergency liquidity, how important is liquidity to the housing market? Because it sure looks like housing is pretty illiquid right now, when liquidity looks still plentiful.

Speaker 2: 1:11

Yeah, so inventory is definitely important. So we went through a period of a couple of years of extremely low mortgageries. So anyone that was looking to buy a house or move or refinance into a lower rate many of them did and we had one point something like 80% of mortgage borrowers might have been up, 87% actually had a rate below 5% and that's chipped out a little bit as people just move or refinance again. But you got to think four out of five mortgage borrowers have a rate at least two percentage points under the current market rate now. So there's a big incentive for people to just hold on to those houses and not move. So that impacts a lot.

Speaker 2: 1:57

That impacts some sectors of housing. On the plus side and the benefit side, if you're looking at home improvements or remodeling, people are staying in their homes longer, which means they're instead of moving into a trade-up home, they are instead hunkering down and getting ready to stay in the house for another 10, 15 years. So they're remodeling and that's great for if you're a company like Home Depot or Lowe's or any of the building product manufacturers that specialize on home improvements, but if you're a company that relies on transactions, it's actually not very good. So we've seen, obviously, existing home sales fall very fast. Last year started to pick up again, but yeah, liquidity in the housing market in terms of buying and selling is at a relatively low. I guess, historically, we'll wait right now.

Speaker 1: 2:42

Is there some metric around that lock-in effect, the duration, sort of like the average length under which maybe people will start to unload that housing meaning? So they lock in the rate but at some point it doesn't matter because it's paid off. So then maybe the thing about upgrade. I haven't actually seen any data on that, but is there anything that suggests that in five or 10 years this lock-in effect assuming rates stayed where they are now would no longer be a headwind? That's a great question.

Speaker 2: 3:10

I haven't looked at that, actually, that specific question, but you got to imagine what triggers a housing move, what triggers decisions around moving either buying a new house or renting a new house and a lot of that's not necessarily driven by the financial side where rates are at and what prices are doing, but life decisions. So there's a probably 2 million household moves every year simply because our families are getting bigger or people are changing jobs or maybe they're downsizing. So there is a chip away at that lock-in effect every year. I think the peak lock-in effect was really last year. So we're going to see it, I think, progressively, slowly, instead of the weekend, over time and think about what rates will have someone tolerate that move.

Speaker 2: 3:59

We did some research and we asked a bunch of households and take this to the green salt, because when you ask about questions and surveys, asking what people will do is less, I guess, predictive than asking them what they've done in the past. But we did ask them what's the rate that would have you look at buying a house again, buying another house or moving from a rental to an owned house, and the most common answer was actually right around 5.5%. So we've come out with that number been in the press. This 5.5% is the magic number for households.

Speaker 1: 4:35

Is there anything to suggest that there's variability around that based on if you're on the coast versus the middle country? I'm going to make the assumption it's maybe a different standard. Only because of what you factor in tax rate, it maybe becomes a different calculation.

Speaker 2: 4:48

Yeah, that's a good question. I'm not totally sure, actually. So I guess there's different reasons people want to hold onto their homes in California. It's not sugar, though, the tax there, but the reassess value. But yeah, that's a good question, I'm not sure.

Speaker 1: 5:03

Yeah, it's something that I think is interesting. New offender, I saw your post around Nashville right and had tremendous boom there. And to be about life decisions, right, certainly work from home makes it a lot easier to pick up and do a totally different state, as long as your employer is okay with it. Has there been any kind of aid data to suggest there's a low down in moving from one state to another and that somehow throws off the housing inventory dynamics and if we're far to the country?

Speaker 2: 5:28

Yeah, love that question. So we've done research on this. We have access to a really interesting data set that's, I think, one of a kind which is tracking household moves from county to county across the country within it's current, within a couple of months. So you can look at this at the census or the IRS stats, but those are gonna be at least a year, sometimes two years old. They actually have it ups through November of last year and we did some digging on this for this, for an upcoming demographic focused research sort of product, and we were finding that when households are so, there are fewer households moving overall and when households do moves, they are moving shorter distances, so fewer moves out of their current metropolitan area and actually fewer moves from cities to suburbs, which was a really big spike that we saw in 2020, 2021,.

Speaker 2: 6:25

Two people would move out of the cities to get more space, to be able to work from home, to get away from roommates. They were ready to leave cities and we've actually seen quite a big shift in the last year of city dwellers if they do move, they're staying in cities and some people in the suburbs, if they're moving, they're staying in suburbs. So that's actually come down quite a bit and you look at, think about why that might be. A lot of that is driven, I think, by where our home is actually available to move into, and so a lot of this is, I think, supply driven where there's just not a lot of homes to move into. If you're a city dweller moving, trying to move on to the suburbs, then there was, say, two, three years ago, so definitely a shift down.

Speaker 1: 7:11

The other shift, of course, is demographic shifts, which I know is the sort of main focus you wanted to get into here, and it seems like any conversation around demographics now is almost entirely centered around immigration and migrants and how that's impacting home values. I mean New York, and I've seen some things that suggest that they're literally telling immigrants they're coming here, or illegal immigrants. Well, you get a cash, you get a rent, anything you want, any neighbor you want, and it's causing some weird dynamics in terms of different boroughs. But talk about how immigration's impacting the demand side for housing and it maybe throws off from the historical analysis.

Speaker 2: 7:50

Yeah, so a lot of the immigration that's happening right now. So we just came out with a re-estimate of the population growth over the last couple of years. We think the census is really undercounting what's happening with people moving, people coming into the country. Probably that's primarily happening at the southern border and for several reasons the census surveys are slow to pick that up and actually missing it in a lot of cases. So we think the population US population grew the single biggest one year increase in history. Again, a lot of that through the southern border. So that's, I think, on the demand side it's impacting mostly along those southern states Texas, arizona, california, new Mexico. What they are immigrants are filtering out of Texas, out of those southern border states, into cities like Denver, chicago and New York City, like you said, and I'd say it's.

Speaker 2: 8:52

It's an interesting challenge as a researcher because a lot of this population is not captured in normal census surveys and normal sort of formal sort of statistics on the housing market. So we're doing our best really to dive in and talk to people on the ground and what they're seeing. And so there was some research I saw recently that if people that they are related in Texas, something like 80,000 migrants were transported from Texas to cities like Denver, chicago, new York City and a lot of them end up initially in city run shelters and city run facilities, so they're not directly impacting the sort of the formal housing market that we think of when we think about apartment REITs or institutional capital that's going and investing or building apartment buildings. This population is not a primary candidate for those types of properties, however.

Speaker 2: 9:54

So when someone does land in the country and claim asylum and they're given a court date two to half years out in the future which is what's happening they become de facto, call it a residence and after 150 days they can actually legally work.

Speaker 2: 10:08

They can apply for something called an employment authorization document that lets them get a social security card, lets them work a job legally, lets them pay once they get a job legally they are paying taxes, let them rent an apartment. So I think you'll start seeing that intact on housing through this year, and it'll be in a few different areas. One is things like rental housing, probably on the more affordable end of the spectrum for dividing it up into class A, class B, class C, based on location and quality of the building. So it's going to be mostly in that lower quality where it's more and more affordable. You're also going to see, I think, demand take up in mobile home parks, manufactured housing again, really all across the country, and primarily where foreign-born populations are already cost-treating. So it's going to be in those southern states, it's going to be in the west, southwest, southeast, new York, chicago, denver.

Speaker 1: 11:40

It sounds to me like that's going to create a delayed crowding out effect for that lower tier and that end up causing some real unevenness in terms of people that are unable to really afford the very expensive homes, even being able to afford low-cost ones.

Speaker 2: 11:54

Well, on the other side of that, what's going on right now in the rental market especially, is just a massive wave of supplies, the biggest supply wave of rental housing that we've seen since the 70s. So what's happening in a lot of these cities right now that are considered very strong growth over the last five, six years, not just since COVID but even before those cities attracted the most development capital and those cities are where the total inventory of rental housing is expanding the most. So if you look at the relationship over time, the strongest growing cities in the last year are the cities where rents have actually fallen the most. So the supply is going to be concentrated at that upper end, that Class A. But what happens is that people this is a mechanism known as filtering people move from these Class B buildings or existing Class A buildings into the new buildings. They're more expensive than the existing buildings, but that frees up a unit in a Class D building and so someone in a Class C building can then move up into a Class B building and that leaves behind a unit in that Class C building. So it's like a sequence of people moving from lower quality into newer units.

Speaker 2: 13:17

So I think there would be an issue if there wasn't a massive wave of supply coming online right now. But there is, and I think you're actually going to see occupancy rates for rental housing either stay flat or slightly increase in some of these markets, especially at the lower end. Thank you, like I said, I don't think of it as much of a concern. There will be some people moving around in the rental market this year because of so much supply, but I'm not super concerned about it personally, In terms of I don't think it's gonna create a big disruption.

Speaker 1: 13:52

All right. So let's get to the title of the space and I think people know that I have a flair for the dramatic in the way that makes things, because the algo does seem to like that but this idea of baby boomers crashing housing. There's been this, this theory, which you pointed out to me, which I hadn't heard before, but it makes sense that you're gonna have this in quote silver tsunami on the on the housing side. First of all, lay out what exactly that means, what are the implications, what are the myths, what's true, what's not.

Speaker 2: 14:20

Yes. So Silver Sonali is not. I don't want to take credit for that. I've heard that term thrown around for maybe ten years or so now. But just looking at this wave of baby boomers and they've disrupted every single industry and part of the economy that they've touched ever since they were, they were, they were born, they rep revolutionized rental housing in the 70s for sale. They've just changed everything and they're gonna continue changing the housing market as they age into the retirement years. So it's just as big, this really massive slug of the population that, just by virtue of the fact that their generation before them was much smaller, they're much bigger. Things are gonna, things are gonna be disrupted.

Speaker 2: 15:00

I would say the silver tsunami is what I I've heard is saying okay, these, these baby boomers have tons of wealth. They can't take it with them, so what's gonna happen to what's gonna happen to their wells In terms of housing? I've heard it more recently that people are just looking at all, there's this slug of of baby boomers that are don't have the numbers in front of me but tens, of, tens of millions of people. They were, they were born in a relatively short period of time and they're gonna start dying soon. So they, they're all. They're also predominantly homeowners. So what happens when baby boomers die? What happens to their house? And the idea is that when the baby was died, they're gonna unleash a sort of a flood or a tsunami of inventory into the for sale market.

Speaker 2: 15:49

We've done some research, we've done the digging on this and our view is a little bit conturing in in in that respect. We looked at so. There's couple of different ways to look at this, but the number I want to throw out here is that the number of homes listed for sale due to old age deaths that's the, that's the, that's the metric we want to look at here, and if that goes up or down or if there's any big shifts year to year, we see a big shift in homes listed for sale due to old age deaths. That would have some implication on what are home values. Home values are in the markets and in 2023, that number was right around 700,000. Okay, so, 100,000 homes listed and sold due to old age deaths. And to look at what, how that changes going forward, we need to look at how many people are gonna be dying every year and then how many of those are in two person households, how many of those are single and single person households and essentially what we've. I'm just gonna bottom line it here because I could go really into the weeds on this. But we think by roughly 10 years from now, that number homes listed for sale due to old age deaths goes from 700,000 to 772,000 a year. Okay, so 772,000 sounds like a big number, but if you compare that to the overall sort of stock of housing for sale housing and owned housing it's less than 1% and the so I would say there's not a whole lot of Steve Dami.

Speaker 2: 17:28

The analogy to me doesn't really hold. It's more like a slow trickle of supply that these aging and dying baby boomers will be responsible for. And then if you look at that's on the supply side and then on the demand side, if you look at people aging into the home buying or home ownership years, the number is actually quite high. We think there's about 12,000 people turning 35 every year for the next 10 years, which more than offsets this effect of dying baby boomers. So I know that's a big question will baby boomers crash the housing market? I'm gonna say it's the opposite. Baby boomers are actually gonna support and drive the housing market for the next more than 10 years now, whether that's directly from buying or improving their house, but also they're gonna be helping their adult children pay for homes that are. Maybe they may have student debt still or they might wanna live in a part of town that their income can't support. But if you have rich parents, they have rich parents. Those parents are helping them buy homes and it really explains a lot If you think about how is the housing market still going, with prices so unaffordable relative to where incomes are? And the missing piece is just home buyers have most home buyers. A lot of them have wealthy parents that they're getting help from. Yeah, actually, just pulling up the article here, I hadn't seen that before. It makes sense, so I think there's.

Speaker 2: 18:56

So I just went through a process of buying a home for the first time and so I'm really at the edge here. We just did a bunch of due diligence, like looking at are there any liens on the property, et cetera, and if there was, I could say if there was a lien on the property because of these solar panels, if it had these, I might have walked away from the deal, but I would say, yeah, that's a. It's with anything, with investing in the home or on a home that really needs to do your research. You need to understand the longer term implications here and understand that, what it means to take on debt and what an improvement project. It's not just about you living in it and enjoying it right now, but if you plan on selling the house for it soon, you think about is that gonna be palatable to the next buyer? So if I'm looking here that, yeah, there's like a risk from someone maybe when we're, say, passing away and their house, their kids, wanna sell the house, but hey, you have outstanding loan on these solar panels. That's a problem, that's gonna throw things. It's gonna throw some gum in the works, as the way to say it.

Speaker 2: 20:06

Yeah, always definitely on the lookout for these sort of hidden leverage and hidden failure points in the financial industry. And back then in 2007, I came in right at the end of that boom, before everything crashed. So it was easy to see in hindsight that, oh, the adjustable rate mortgages to people that did not verify their income, that's a big, that was a big no-no. And there's laws now around that prevent that. The Dodd-Frank financial regulation big legislation that came out a few years after that really squashed that kind of lending. And, again, I don't know as much about the lending space for residential solar. I would guess, though, if there are problems that pop up here in terms of credit quality or defaults or anything like that, it'd be more isolated in nature and not necessarily systemic, and I wouldn't put any take that with a grain of salt, because I haven't done a lot of research on this, but I could imagine we could always find sort of situations like this that oh, there's some financial mis-doing is anywhere you look. So I don't have a really great answer to that.

Speaker 1: 21:11

There's something that I've been thinking about and I have been wrong in saying that housing would be fucked, as I say affectionately for a lot of things in the last two years, and I think part of that also just around the way asset markets have behaved. There is an argument to be made that one of the reasons housing also has been elevated despite higher mortgage rates is people feel like they can afford it because of their investment portfolio. Any truth to that or any kind of data that suggests that there's a sort of a correlation between the wealth effect of the stock market creating to housing and then that throws off that as a way of traditionally thinking about the role of mortgage rates slowing down housing?

Speaker 2: 21:51

Yeah, so we've done some research on this and the sort of the wealth effect does have an impact on housing. I'm trying to fight it here, but I guess it depends. I think, if you're saying you have a sort of a flair for the dramatic, I have a flair for the boring, where things are maybe a little less boring than they might seem at first glance, and I guess it would make sense to me that someone's feeling wealthy because, therefore, when K is up 100K in the last year, that they're more willing to go and spend, and that's well documented in economics research literature. I'd say that, if you look at it, one thing I would look at with housing and demand for housing is there is an aspect of the wealth effect, but it's mostly because of life changes.

Speaker 2: 22:46

Like people buy homes because they need homes. They might buy a bigger home because they have another kid, or they might buy a home in a different part of the country because they got a new job there. The large majority, the biggest reason people buy homes is because they need it, not because they have excess cash fly around, but in markets where there is a sort of a media sort of mentality happening, which was definitely true in 2021, parts of 2022, definitely in 2020, and going back to the last housing bubble, people do make silly decisions in hindsight with taking on mortgages that they can't afford or buying homes that they would expect to be able to rent out, or they expect to Airbnb or whatever that is. There is definitely some sort of mania that happens in markets, but the vast majority of housing activity and housing purchases are from people that just need to live in those homes.

Speaker 1: 23:45

Maybe NVIDIA delayed the housing prices dropping? How much to the AI narrative has driven the large indexes which a lot of people are invested in? Obviously, let's talk about the home builder side for a bit, because the other argument is you're going to have this lagged effect of old construction that has been ongoing and at some point that helps with the shortage. Any complications there? Certainly, on the thought side, home builders have been on fire. I've been surprised that lumber has not confirmed that, because lumber is correlated to housing starts, but maybe that makes some sense. But talk about the home builder construction end of things as a solution.

Speaker 2: 24:21

Yeah, so those are one of the things that we saw coming, I would say, back in mid-2022, when mortgage rates started spiking and we knew that there was this generational wave of people my age or the millennials that are aging into their home buying years. The demand for homes is just going up and baby homeowners are not letting go of their homes. There are, in many cases, buying two homes if they can or renting homes near their grandkids, and there's this huge wave of demand and fewer people are transacting. And now builders at the time were pulling back and we saw the supply squeeze right. So it's it can played out the way we expected and the home builders we were saying all along that they would be the supply that is needed to solve the housing supply shortage issue. Okay, it's not going to be from the existing home side, it's going to be from home builders. So you know there's it's hard to make predictions out one month or a quarter, but yeah, I think the home builders are definitely still positioned to capture a lot more capture market share from the existing side. In terms of total sales they have.

Speaker 2: 25:37

The biggest builders are taking up more and more market share. They're more capital efficient. They can. Their home building operations are more like a factory, and then you think of somebody who builds one or two homes a year. The biggest home builders are just just churning out homes because they have the best relationships with trades. They have long-term relationships and agreements with their suppliers. It's it's actually what I would say. It's the thing that's going to help us solve the sort of housing shortage which we've estimated at around 2 million units. It's going to have to come from builders, because right now you're seeing rental developers really pull back. You can see people holding onto existing homes and and home builders, especially production home builders, and the large public, and the large publics are able to increase scale the best.

Speaker 1: 26:26

They have to, they have to outpay demand itself. So there's the lagged response or lagged inventory surge, you can argue from their building. But if that rate of change is still lower than the demand at the point that that hits, then we're still in the earth and we're still in the same problem, the same problem of of just just elevated housing, and that doesn't really solve it.

Speaker 2: 26:48

The relative argument against demand, yeah, so you're going to have looking at this, it's. It's. There's some constraints on the system, right. There's like the availability of land in places where people want to live. There's a lot of local control over what gets built and where and how and when. That is always going to be like a counterbalance to supply meeting demand. I would say that zoning or lack of labor or just local sort of local opposition to big, big new developments, things like that there's. I think it's always going to be these governors on housing supply Is there?

Speaker 1: 27:26

anything to suggest that supply changes at a faster rate when, say, the yield curve uninvert. And we're really. We're really where I'm going with that is like between recession, unemployment and and inventory Sounds great.

Speaker 2: 27:49

Yeah, so I think of how many homes can actually be delivered in a given year. Okay, regardless of what supply is doing or, sorry, regardless of what demand is doing, is there a limit on how many homes that our economy and our builders and everyone else can supply? And if you look at the period 2020, 2021, 2022, the fastest run-up in housing demand that I've seen Okay, and mortgage rates were under 3%. Just money was cheap, people wanted homes and so people were the whole economy I would say the whole economy, but I'm exaggerating there but we saw it that there was all the incentive in the world to maximize production of homes, to have people be able to buy homes and then live in them, and housing completions never really went above 1.6 million a year, from what I recall, and that's with all the available labor dedicated to building housing, all the suppliers supplying everything they can, and that's really topped out.

Speaker 2: 28:57

And we've heard from CEOs of building products manufacturers the actual suppliers of products that go into the homes that they're constrained on supply. They're constrained on their production. Okay, so even if there was a huge increase in demand or fluctuation in demand, there is a limit on how many homes can be built and these production decisions get made over three to five year timelines, so even if they did want to expand supply, it would take a long time to do it. And I think your question was does the rate of housing start to rate of?

Speaker 1: 29:32

supply. What do they do? Because the unemployment is tied to housing. So if yield curve uninverts, everyone has taken off the table recession and they only worry about a recession when the yield curve is really uninverting. They only worry about a recession with software going down, so which again even relates to the wealth effect discussion.

Speaker 2: 29:48

Yeah, I would say the yield curve, I think, definitely caught me by surprise a little bit, going back to the 80s, and the only time a yield curve inversion did not immediately lead to a recession was like 2018. So, to imagine COVID the COVID recession wasn't caused by the yield curve, but it seemed to have a pretty close to 100% batting average. And now, if the yield curve is you guys think that's from the said lower, reducing rates or the long, long end rising, and that to me just spells, if it's the long end rising, it's going to put upward pressure on mortgage rates, which is going to temper demand. So I think it's a really matter of why the yield curve is steepening or uninverting. Is it because the Fed is lowering rates or because the 10-year is going up? If it's because the Fed is lowering rates, because they see the inflation problem solved, that to me spells a stronger demand environment for housing. If it's because inflation applications are actually rising or the 10-year is rising in terms of real rates, then mortgage rates are going to adjust accordingly and that's going to tamp down demand.

Speaker 2: 30:59

So I guess that it depends. You got to look at where inflation expectations. What's the Fed going to do? What are they signaling? What are mortgage rates doing? What is that spread between the 10-year treasury and the 30-year mortgage? What's that doing? There's a lot of moving pieces in there so I'd say it's a little hard to say. If the yield curve uninverts, then demand is stronger for housing. I think it's more tied to why the yield curve is uninverting and what's going on with mortgage rates.

Speaker 1: 31:29

Eric, for those who want to track more of your thoughts, more of your work, we're going to wait for them to.

Speaker 2: 31:32

Yeah, you can follow me on Twitter. It's at Eric Finnegan. See to see me here. I've posted on LinkedIn too. You can go to Jumbers website, jbrccom. You can sign up for a newsletter there. We have a what I think is a very exciting new research product releasing to clients in a week from tomorrow that is 100% focused on demographics, which we think sells a huge gap in the housing space. There's a lot of people out there that are analyzing demographics or applying on demographics, but they're not looking at it from a really comprehensive view, and that's what we've done here. This is like a one place that you can go to get all the relevant information on demographics and housing, so we think we're really excited about it. If someone's interested in checking that out, get jbrccom and you'll find it from there.

Speaker 1: 32:24

Appreciate everybody joining. Please give Eric a follow here, folks. This will be an edited podcast under Lee Lag Live and hopefully I'll see you all on Friday when I'm doing another space. Thanks, Eric, Appreciate it Awesome. Thanks, Michael, Take care. Cheers everybody.