A true data geek, Mike founded Altos Research in 2006 to bring data and insight on the U.S. housing market to those who need it most. The company now serves the largest Wall Street investment firms, banks, and tens of thousands of real estate professionals around the country.
In today’s ever-changing housing market, how can you make sense of all the numbers and data? What do they mean for builders and home-buyers?
In this episode of the Top of Mind podcast, Mike Simonsen is joined by Ali Wolf, Chief Economist at Zonda, to interpret today’s housing market data. Ali talks about the implications behind the number of new construction homes, millennial home-buying trends, and what forecasters are saying about the future housing market.
About Ali Wolf
Ali Wolf is the Chief Economist for Zonda, the largest homebuilding proptech company in North America. As Head of the Economics Department, Ali manages and analyzes the content for Zonda, runs special research projects, and strategizes with the nation’s largest homebuilders. She gives presentations nationwide covering topics across the housing market and the broad economy. Ali is also the creator of Zonda’s proprietary indices, including the New Home Pending Sales Index and the New Home Lot Supply Index. Highly regarded as an industry expert, Ali is quoted frequently in national publications including CNBC, The Wall Street Journal, Forbes, and Yahoo! Finance. She has also appeared on national and international TV and radio programs such as Bloomberg TV and Marketplace. Ali serves as an advisor to the White House, providing data and insights on the US housing market.
Here’s a glimpse of what you’ll learn:
- Ali Wolf shares how Zonda got started
- How did Ali become interested in housing data?
- Zonda’s strategies for collecting data
- What is the housing index telling us right now?
- The implications behind the rising number of new home constructions
- Millennial home-buying trends
- Do the numbers indicate a coming change in the market?
- Market risks outlook
- New releases from Zonda: the Zonda Affordability Ratio (ZAR)
- Why “Zoom towns” are becoming more common
- Where are the surprisingly affordable markets?
- What are the signs of a falling market?
Resources mentioned in this episode:
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Each week, Altos Research tracks every home for sale in the country, all the pricing, and all the changes in pricing, and synthesizes those analytics to make them available before becoming visible through traditional channels.
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Welcome to Top of Mind the show where we talk to real estate industry insiders and experts about the biggest trends impacting the market today. Enjoy the show.
Mike Simonsen 0:13
Mike Simonsen here. Thanks for joining me today. Welcome to the Top of Mind podcast. This is where I talk to the smartest leaders thinkers, doers in the real estate industry. We like to go be on the data that that dive into the context and views and opinions. You know, at Altos Research. We track every home for sale in the country. We track all the supply and the demand and all that pricing and the changes in that data. In most of our work is analyzing the data and presenting it out. The top of mind podcast is where we get perspective and context. And so what we're going to do today is talk with Ali Wolf from Zonda. Ali is the chief economist for Zonda, the largest homebuilding proptech company in North America. As head of the economics department, Ali manages and analyzes all the content for Zonda run special research projects strategizes with an agent nation's largest homebuilders, and presents nationwide covering topics across the housing market and the wider economy. Ali is also the creator of Zonda has proprietary indexes, including the new home pending sales index and the new home lots supply index. And these are important because Ali's skills and the work of Zonda is actually very complementary to the work we do at Altos Research, where we're looking at, at the existing stock and homes listed for sale, Ali's looking at the new construction and the trends in adding to that stock. So we're gonna geek out on some data today. And we're gonna dive in and see if we can get some perspective on the market right now in the coming year. So welcome, Ali Wolf.
Ali Wolf 2:03
Thank you so much, Mike. And it's fun because I feel like I know you from Twitter. We're Twitter friends. We're Twitter friends. Nice to actually connect on this podcast as well. Thank you for having me.
Mike Simonsen 2:14
I really appreciate it. So let's start off. Tell us about Zonda.
Ali Wolf 2:20
Yeah, so Zonda is really actually a fun backstory where Zonda right now like you mentioned in the introduction, we're the largest homebuilding proptech company across the country. And we came about because there were two competing companies. And it's interesting that we would even call each other competitors, because we had completely different datasets. So there was this, this company that was called Metro study, and there was this company called Myers research. And Metro study had all of this locked data across the country, they had people literally driving cars, going to two different developments and saying, there's a bulldozer there, there's a stake in the ground, and they would classify it as such, what Myers research had, and that's the part of the merger that I came from Myers research was, I always say it was the demand side, I don't think the rest of the company would actually say that, but what we would track is the actively selling communities. And we could tell you, where are the best actively selling communities? Who are the builders, what are the best price points, and those two companies came together, we now track the entire building life cycle. So as you mentioned, Mike, we track the entire new home side, from raw land all the way up to the closing out of a new home community.
Mike Simonsen 3:27
And this is a big day. So it's middle of December, we just had the new home construction numbers. So we're gonna talk about those today. Because that's like the like headline, interesting stuff going on there. Lots of implications, too. So I can't wait to get your take on that. How did you get into housing data?
Ali Wolf 3:47
Oh, gosh, I will try to keep that short. I think. I always knew I liked economics and always knew as of you know, the the first class I took it was like, This is my, this is my field. I love it. And I had planned on going into law school, I think just because what I had heard is that if you get a degree in economics, you need to apply it to something. And at that point, I didn't really know what that application was. So just law school made sense. And I think by by some kind of divine intervention or something, someone talked me out of that I ended up not going that route. And thank goodness because that's not right. That's not my personality, it wouldn't have liked it. And it was my senior year of undergrad I happen to take a housing economics class and of course, I had seen my parents buy and sell homes, you know, all that stuff. But I never studied interest rates and affordability and inventory and policy and and that really, I had already gotten into a grad program for a completely different degree. It was international political economy, moved out to London, in the UK, and switched my degree the first week I was like, I need to be in I need to be in housing economics. I need to be focused on that. And so it was a bunch of weird twists and turns you know, the The best laid plans, twists and turns. And here I am
Mike Simonsen 5:03
basic. So you actually, in, in undergrad, you recognize housing economics as the narrow niche that you were interested in.
Ali Wolf 5:14
It's an embarrassing story in that I used to go to Barnes and Noble and go to their economic section. And I would just pick out books like just what book should I read and I was going on vacation, I happen to pick up a book called the housing boom. And I brought that on vacation with me and my, my day you get the syllabus, your senior year, at that housing economics class, the textbook for that class was the housing boom and bust. And I was like, Oh, I already read that book. I read that on vacation. And I think the professor from that day on liked me, and I'm sure that didn't, that didn't hurt that you just felt like, you know, invested in the class because of that, too.
Mike Simonsen 5:51
That's amazing. That's really fascinating. My journey is actually a real personal one. Like I bought my little tiny little overpriced piece of shit Silicon Valley house in 19 2001. That was two bubbles ago, like to say and, and so like I'm was analyzing for my own self. And it's actually kind of one of the things that the reasons that I'm so excited to have you on the call today is because, you know, I'm a middle of San Francisco, ima, you know, so it's, it is Bay Area housing market it you know, these are 50 or 70 year old homes and has nothing on the market. Like it's a real peculiar market in the world. New construction to me, personally, is super foreign. It's like, you know, it's the middle of Texas. I'm like, I have no idea about what that what that world is like, and so so, you know, where were we when we built the Altos products, like we're focusing on resale and and that that existing home market, and it never occurred to me at the time to even think about new construction, and what that has so so like, Okay, so let's dive in and get some geeky odds. So and I'm also by the way interested in in the Zonda approach today, you guys do a lot of surveys, like you, you call a bunch of people to get your data. Is that cray? Like to get some analysis? Is that right?
Ali Wolf 7:12
Yeah. So it's, it's a it's we do so many different ways to collect data. So one is yes, we have a dedicated research team that's picking up the phone and calling new home communities they have, you know, let's just say one researcher has 300 communities that they're in charge of every month, they have to call and so they have the relationships with the salespeople, they check in with them every month, like I said, we still actually have people that are driving the different sites. And we have satellite imagery. So we're able to track based on we've we've taught the satellites, so I guess the the the back end of that, we've taught them to say, Hey, that's a planet lot that's going through a different stage of development. So we've taught them to actually be more efficient than what a human would be. And then we supplement all of that with a monthly division president surveys. So there's a lot of different ways that we're collecting data.
Mike Simonsen 7:58
Yeah, the division presidents are the people who are over like a whole metro area.
Ali Wolf 8:04
That's exactly it. Yeah, new Metro,
Mike Simonsen 8:06
and then who your who, your customers.
Ali Wolf 8:09
So our clients will be builders, developers, private equity, hedge funds, those would be the paid ones. And then, of course, we are constantly talking to policymakers to press to just talk about the state of the market as well.
Mike Simonsen 8:23
That's terrific. Okay. That's an excellent background there. So we call the podcast Top of Mind, what is it's now? December 2021. It's been two nuts years in the housing market. What's top of mind for you right now.
Ali Wolf 8:37
So two things and then you can decide which of those two you want to go with? The first is lots. And I know you mentioned the loss of y index. I know I've mentioned a few times how we track lot data. But the reason that's so important is you've you've already mentioned that the data came out this morning for sorts and permits. I don't know how anyone can forecast the housing market without knowing what's happening with lots not not all, not your side of the market, the new home side of the market, you have to know Are there lots for builders to build on. So that would be one of the critical things that we're paying attention to. And then the second would be every year for the past. I can't remember if it's five or six years, we've been doing a millennial survey. And I just launched my millennial survey, I think it was a week or two ago. And we have really cool insights that are coming out of that I have 500 respondents. So obviously we're not at full. We're not there yet of having our sample size that we want. But there's still some kind of early signs in there that I think are fascinating.
Mike Simonsen 9:34
Okay, so this is all kinds of good. So let's start with a lot. So lots coming out of the the bubble burst. homebuilders shed a bunch of lots to keep the cash what's happened in the last decade. And what's the index telling us right now?
Ali Wolf 9:52
Oh, my gosh. So yeah, so I guess going back and we'll do the history really fast is that last cycle, it just felt like the demand was Gonna go on forever. And you could just keep moving further away. And you could keep absorbing those lats and developing those lats and there will be people to buy those homes. As you mentioned, there was a point that that didn't happen. And so some of those lats became what we call zombie law where you had lots out there and they a builder would have them and they wanted to get them off their books, or they had to sit with them, whatever it was, there was this this buildup of inventory that over the past 10 years, and probably 15 years at this point, builders have been kind of working through that inventory, maybe going back to the city and saying, We originally planned this remember, McMansions were popular way back when they're not as popular today, even though I think a lot of people still think that's all builders are building, which is not the case. So they would go back to the city and say, Hey, can we do this different? Can we do a more dense community? Can we try to adjust the product type. And so that's one of the big things that that changed. And over the years, again, builders were absorbing it, where we are now, starting in probably June of last year. So that'll be June of 2020, there was this mad dash to absorb lots and to get lots into get ready. And this was after every builder pausing in March and April and saying Wait, nevermind, this is this is another housing bust, we don't want to be involved and then realizing the markets going crazy. So our last supply index right now shows that vacant, develop lots. And so that means a lot that builder could go by tomorrow and start going vertical on a home, they can develop losses at an all time low. So it means that available lots are very constrained. But builders have been buying lots. The reason it's at an all time low is because they've been purchased. So that's how you can support some of the building that we're seeing is because anything that was available in any kind of decent location builders are trying to now bring to the market.
Mike Simonsen 11:50
Wow. Okay, so and as we know, with the the permits, numbers announced today, we have the most new construction homes ever that are ever in whatever, 40 years or something like that, that have been under construction for maybe 50 years. I like that in that construction process. Correct. And that's really these, like, all the lots have been bought up. And there's somewhere in that process, we've had all the supply delays. So they're not they're starting more they're not finishing. Right? What What's the implications? What are we looking at there? Does it mean? Because like, I hear a lot of housing market bears who look at that and say there's their record high numbers of homes in the middle of construction, therefore, there's a giant wave of new supply going to happen, how should we look at that.
Ali Wolf 12:43
So in a lot of cases, so there's two different ways to look at it. And I don't agree with that bear analysis just to set the tone. The first way is that, in a lot of cases, those homes that are being built already have a buyer attached to them. And what's happening is they're not getting the windows, they're not getting the refrigerators are not getting the garage doors. And so what should have taken x amount of months is now taking Y amount of months. And that's stretching it out, which means more homes are getting stuck. And then under construction phase longer than they normally would. The second way to look at that is that builders have realized we could sell more homes if we had more homes to sell. And so they're trying to do more spec homes, which going back to the past spec homes got builders and a lot of trouble during the mid 2000s housing boom, so they stopped. Now you want to do spec homes, if you're a builder, because you can guarantee that that home is going to be built, you can decide, okay, we're gonna they're gonna be more efficient building processes, because then you're gonna say we're gonna have all of these windows of this size, and we need you to guarantee that we're gonna get those windows instead of like picking one window size alley, picking another window size, you know, all these different customizations that will hold back the production of homes. So I would say that's not a sign of overbuilding. It's a sign of a strategy shift. And it's a sign of the times because of the supply chain problem.
Mike Simonsen 14:06
Interesting. Okay, so yeah, it was like, homes went from four months, and now all of a sudden, they're looking at 14 months or something to complete. And so they're building up there. Okay. And, and so the strategy shift is something I had considered that's like, builder strategy. Less custom, more standard. Yes. And interesting. And so in some senses, like, that's maybe means that the builders while they're sitting on all this stuff, try to get it done. They're actually in a stronger position than they, then they then they're gambling less they're less spec homes happening. Is that what's going on? Like? Is there any indication of like financial strength?
Ali Wolf 14:52
I would say it gives builders a little bit more certainty. So So one, let me step back. One thing that changed And not every builder did this. But there was this thing that was introduced in, I think at the beginning of this year. So 2021, that was called a kick out clause, which was builders would say to a buyer, I am willing to sell you this plot of dirt, and I will build you a custom home. But if my costs go up, we're gonna share how much my costs have gone up. And that actually became a bit of a PR nightmare. Because buyers didn't like that, you know, they thought they bought the home for 400. And now they have to spend 20,000 more. So what we found is that builders had said, You know what, instead of putting the customer on the line, and instead of kind of hurting that relationship, if we start spec homes, we can wait to sell at a certain stage of construction, we now know let's say framing is a huge part of the cost of a home if they wait till framing, they know how much their lumber pack cost. And so now there's not as much uncertainty around the cost, they have more certainty around the price and they can keep the customer happy on the other end.
Mike Simonsen 15:59
That's interesting. You are the the homebuilders, do they hedge that stuff? Like are they doing any financial hedging, like, you know, on lumber and stuff like that to to try to like that, and I can't imagine I know the small guys, aren't they? They kind of wing it. But how does that work for those guys?
Ali Wolf 16:19
And I think historically, the answer has always been Yes. And I think there's just been a little bit more pushback on the supplier side. And I haven't had a conversation recently. But I remember there was a point that that you weren't really given much of an option to hedge I don't know the inner workings of that from from a supplier point of view, but I know that that has evolved as the market has changed it as well.
Mike Simonsen 16:39
Interesting that actually brings us so as they build these more centered homes and and they change the the sales side and and the target market that actually brings us to the other thing that you said top of mine was the millennials. Right? So so tell us what we're learning about the millennials.
Ali Wolf 16:55
Yeah, and, and I want to start with something that I probably shouldn't even say, but I'm gonna say it anyways, which is, I find that people it's no, it's gonna be this is gonna come off so wrong, but I'm gonna say it. Um, I have found people say, and no offense if you're one of these people, but I have had people say, you know, look at the number of home sales, because we have good home sales, there is not any kind of affordability challenge in today's market. And if you ask me, that's just about the most elitist thing that can come out of someone's mouth. Because that's coming from someone who has a good income, who maybe had already owned a home, they have some equity, they can take advantage of low interest rates, they didn't lose their job during the pandemic, like I think that is a narrow scope of maybe higher educated higher income individuals that are saying that and they're saying, Well, I can still buy a home. What are you talking about, and our data from the millennials. And by the way, the way so we classify millennials, I know it depends on the source between 1980 and 2000. And I don't ever since since the launch of my millennial survey, I don't want only millennials that make over 100,000, or only millennials that make over 60,000, I want someone who is sitting on Facebook, they see my Facebook ad and they click on it, I want them to be a renter, I want them to be a stay at home parent, I really don't care who you are, what you do, I just want to hear what you say. And of those that are renting. The number one reason that they're still renting is not because they want to rent forever. In fact, we only have 7% of millennials that never want to own a home, it all comes down to affordability and their ability to pay. And that's either I can't afford where I want to live, or I have student loans or I don't have a down payment. So we do know that there are millennials buying homes. Of course there are. But there are plenty that are seeing the market and saying wow, my income, maybe it's grown, but it hasn't keeping up kept up with how much prices have gone up.
Mike Simonsen 18:46
Yeah, for sure. And as rates fall, and the payment is more affordable, like that's what was one of the dynamics of the last, it's actually probably no longer true. But like real even as home prices were climbing rates are falling, and you know, payments were getting more affordable. But we still had the downpayment problem.
Ali Wolf 19:07
Absolutely. And, and it goes back to it depends on who you are, because what our survey showed is that 60% of millennials saved more money in 2021 than 2020. So again, if you were in a good place, you probably do have a little bit more money towards the downpayment plus, as you know, the FHA loan limits have gone up. And so now there's a little bit of assistance where you can do a low downpayment loan. And by the way, if you're going to go talk to a new home builder, they're not going to discriminate against you being an FHA buyer, like someone who's in the existing home market who would say they're not discriminating, but we all kind of understand that they're going to take a 20% down payment or an all cash offer.
Mike Simonsen 19:49
It was do you notice in your in the millennial data, do Is there a demographic appeal to new construction versus existing? Is it changing? Or is it the same percentage wise?
Ali Wolf 20:05
Such a good question, because that's one of the results I was looking at today, it seems, it seems that the reference is new, but the purchase becomes existing. And I think some of that does come down to the affordability aspect. But that's changed a little bit because the spread between new and existing homes has come down a little bit. And that'll depend on the product. And you know, there's a lot of other factors that go into that. But a lot of times I think, for in particular, the millennials that are cost constraints, not the ones that sky's the limit. The the the existing home market is a very good entry level, starting points.
Mike Simonsen 20:42
Yeah, interesting. So the spread, meaning the the new construction tends to have more amenities and as price slightly higher, it's a more premium product than the existing stuff. I can make sense. That's funny, I, so I've bought three homes in my life. And I noticed the other day that in all three cases, the seller left us motor oil in the garage. Like, that's like, that's an existing home, they were there for years and years and years, you know, and then they left. And that was like, as like, hi, I wonder what it's like to buy a brand new home. I got the buyer, he'll take care of whatever this you know, I changed the oil in my car in 1972. And it's still sitting there in my garage.
Ali Wolf 21:23
I'm exactly the same. I bought two homes, and they both have been existing. And for me, I just can't, I can't handle the choices too many choices is too much for me. So I like seeing what a house looks like I know I like knowing what the floor looks like with the wall color. And so that's why I
Mike Simonsen 21:39
really like as opposed to before it's even built. Yes. Yeah, yes. That's wild. Yeah. For me, I have I have the I have an immediacy thing, as opposed to like, Yes, money down now. And who knows is gonna happen in 14 months, or you know, however long it's gonna take.
Ali Wolf 21:55
Yes, exactly. And I think one of the interesting things back to your question of new versus existing, I threw in a question about would you be willing to buy a renovation, like a house that needed some work, and I was shot, so I wouldn't, but that's because I'm not handy. But 80% of millennials apparently are either handy or believe that someone in their family or you know, with enough YouTube, they can they can do it. So 80% of millennials said Yeah, they'll take a house that needs a little bit of Reno, but but with a caveat. So I'm sure you're not surprised. One of it was yes, as long as I can get a deal. Good luck, or yes, as long as the renovations are reasonable enough, you know, I don't have to get the whole house and start over. But if there's a little bit that I need to do new windows, you know, that kind of stuff. I'm willing to do it.
Mike Simonsen 22:36
That's one of the one of the the impetus for the work that we do at Altos Research is when I bought my little old, overpriced Silicon Valley house, we bought it in the expensive neighborhood and but in the the lowest price quartile and it was 2001 to two bubbles ago, and and the NASDAQ bubble was bursting in what what what happened was the high end of Los Altos town were and at the time, but were like $2 million stock option homes, those evaporated, but the low end didn't go anywhere. And so by tracking what we do is track everything and price range quartiles. So the high end of the market may be behaving differently from the low end. And then you can look at and you can say, Okay, I'm buying in the low end, the lots the same sizes, the next range up and so a remodel can move me up a notch, but it can't move me up to the top because those are the bigger lots and so you can see that anywhere. And and I think it sure seems to me like the, the narrative for millennials and in is that, you know, real estate's been a really great investment there, you know, came out of the bubble burst, and then their entire adult lives, it's been a really good deal to own the rates are so low and revenue per home, like rental income goes up. And so it seems like a pretty pervasive thought that like, this is a good deal. And we can go improve a home and and makes it make some money on it.
Ali Wolf 24:08
But what's interesting, too, so I agree with that. What's interesting is, while it was and I would say even before the pandemic, it was in particular, good deal, because we took us so long to fully recover in terms of prices, compared to last cycle, there were so many scars. So you had to be someone that was willing to say, I saw my parents lose their home, or I saw my parents lose their job. And I don't think that will happen to me or I think I'm going to have enough security and so you of course, had people buying homes, you know, before the pandemic but I think the pandemic was kind of that that powerful force that that told people you know what, maybe I should get back into the market and I can get over some of those scars and now I legitimately need a home. I want a home and I'm willing to jump in and so we definitely have seen more activity as you know, more activity since the start of the pandemic.
Mike Simonsen 24:57
Yeah, fascinating. Let's shift to the two questions are generally what do you think about like the 2022? And, you know, do you see what, uh, signals that you look for to know what, like when this bull run ends? And do you have specifically in your data leading indicators? Like, are there? Are there numbers that turn in your data before the the market as a whole turns? Are there other signals like that, that you can that you can point to with a correlation?
Ali Wolf 25:30
Sure. Okay. So starting with the forecast for next year, we're calling for growth, we're calling for growth in terms of prices, sales and inventory. But I and inventory, imagine, sorry, inventory growth, inventory growth, okay. Yes. But again, think I'm coming at this from a new home side. So I'm going to pull up, you know that I like my papers. So I want to pull this up. So I can say everything accurately, what we have for single family housing starts is a 5% increase in starts next year, over this year. And when we had talked earlier, Mike, we talked earlier about the lot data, we talked about the making develop lots another thing that we look at and kind of your idea of what can we see going forward, we have lots under development. And so a big develop a lot, like I said is a builder could buy it tomorrow and build a home on it lots under development is that we know something's happening. They're trying to get that to a finish lot so that it can become a vacant developed loss. And so for us looking at that data, tells us that there's a lot of lots of development 14% increase compared to last year. And we believe that builders are absorbing those what those will build on those. But we're trying to try to be realistic about the supply chain challenge, the labor challenge, the governmental delays, all of those different things to not say, hey, we think it's 30% growth, we think it will grow, but maybe not, not as much as the industry would like it to grow. I wanted to layer in we talked about our builder survey. So we asked the builder. So that was our forecast. And then we said to the builders, what are you expecting for housing starts. And the reason I like to do that is I mean, the builders know what they have lots of control. They know that they know how many people they have on staff and all of that. So we have 53% of builders, which is actually lower than I would think 53% That think starts will be higher in 2022 and 2021. But 24% that think it will be the same for the majority are saying starts are the same or higher, then for us to you know how I said you can't forecast starts without knowing lots, I think you can't forecast sales without knowing starts. So you know it, it becomes this this this complex web, but our forecast is that sales will go higher, we have a higher number next year, we actually have 12.5% growth in New home sales. And that's on the belief that we talked earlier that some of those spec homes built this year will become available to consumers next year, plus the release of different new communities and we believe community count goes higher. Last thing I'll say before I turn it back to you is that 47% of builders think that contract sales will be higher 47% think higher next year, and then it's 28% thing flat. So similar thing where it's flat to higher is the expectation for both starts and for sales next year?
Mike Simonsen 28:13
Or are these folks are they skilled at forecasting? In other words, I get a look at the parallels the you know, the interest rate forecasters and and every time we look at interest rates, we all think, well, they're really low, they must go higher. So we always forget everybody forecasts are higher, but for 40 years, they've been falling are are these are these folks. are? Are they are they? Are they better at forecasting their own like, like future?
Ali Wolf 28:42
So it's unfortunate when we have recency bias, because if you were to look at what the builder thought for 2020, they were wrong. And when you looked at one to one, they were probably wrong. But if you thought back to a more normal year 2017 2018, I do think that they had a pretty good understanding of how many lots are coming online, they had an idea of their interest list, they had an idea of who their consumer was. And so they were able to have more accurate forecasts of we believe that our division because it's going to start on the division level, the division is going to know how are we gonna open new communities next year, all that good stuff. So I do in recent memory, probably not so much. But also, by the way, I don't think economists or analysts are particularly good at doing it when the world is changing. Yeah, either. So I don't want to hit them for that. But I do think builders also are trying to account for what they know to be supply chain challenges because there's been really good communication recently from suppliers that are saying hey, they've sent out letters emails to their major clients and said this is what's going to happen in 2022. And I want to be able to plan accordingly so I do think that they have better insight then most of us into what the real How realistic is it to get x many doors for next year?
Mike Simonsen 29:54
Right? So okay, so So we're looking at everything in your data says like this great growth this year, there's growth and sales is growth and production, like all of the things are growing. Same things in our data, AI, everything we look at says demand is high supplies, low prices are climbing, there are risks that the train comes off the tracks, they're not in the data yet. What are the risks that you're looking for? Like, when what when do we go? Like, what do we pull out our cash before everybody else knows.
Ali Wolf 30:28
So a couple things, from the data, one of the first early signs on a builder point of view will be cancellations. And that's going to come mostly from surveys or conversations, and cancellations usually do not all hit it once you start to have some people on the margin go ooh, like I feel a little bit uncomfortable about the market. And you'll start to have builders say, hmm, I felt like our cancellations started to tick up. And so that's probably a little bit closer to the end. But but we're always watching cancellations to us that is either I am a friend with a CEO of a home builder. And he said that's his number one thing that he tracks every single week, please don't tell me there's more cancellations for us. And I will say this goes back to our people, right and forecasting for us. We looked at last cycle and one of the earliest warning signs you could find was the build up of quick moving inventory, which is the spec inventory that we talked about, do builders start to have homes that aren't selling? Because now that's telling you something's going on with demand, even if we do have this, this underlying supply and demand imbalance if que mas building up? Why are buyers not buying it for one reason or another? Another thing I would say is going back to my conversation, or I guess my point on millennials is that we've seen the tiniest, tiniest, tiniest increase in builders saying they're running into qualification issues. That means it's not it's not alarming. This is not me saying Hey, bring the alarm bells. But this is me saying we're gonna watch the qualification number because we know that who has bought recently have been higher income, higher downpayment excellent credit score individuals would if we don't have an endless pool of higher income, higher credit score higher downpayment individuals, and when the market has grown up so much, and now we're going into our next tier of buyers, what if they don't have as good of a credit score? What if they are struggling to qualify? So I would say that's another thing that we're watching. And then you already you already hit on it as a joke. And I think we all laugh at ourselves about interest rate forecasts. But if if we're wrong on interest rates, I know that there will be consumer shock to the monthly payment. Could you talk about that the monthly payment is favorable, you look at it, we have dirt cheap financing, but if that changes, people often will buy on that monthly payment and that could impact it. That's what I'm looking at. What do you have anything? That's like your key thing.
Mike Simonsen 32:41
Yeah, so this is great. So the cancellations and the quick moving inventory? Do you have those as like a time series?
Ali Wolf 32:48
Do you have a quick movement? Yes. Cancellation? No.
Mike Simonsen 32:51
Okay, so on our side, we're watching so we watch the active stock all the homes listed for sale. And the leading indicators in there are a percentage of homes on the market that have taken a price cut recently. So the rule of thumb nationally is about a third about a third 35% and some markets where there's like more investors and bigger bill like Phoenix, it's it can be higher like 40% in the hot California markets, it might be 25%. So and and these are homes that get listed and they need to take a cut sometimes that strategic sometimes it's you know, whatever bad expectations, whatever the reasons are, but a third of them. And then when the markets hot, a third of them think they overpriced, but only 25% need to cut because some of them got their offer. And then 20%. And then on the other side when the market cools. Now price reductions we look around, it's Oh 40% of the markets taken a cut 45% Fifth half the stock has taken a price cut, because the same reason, the cancellations it correlating to the cancellations like wow, I I'm not going to get this like I got cold feet, I don't have the cash I thought I had and what we saw was so you get this real consistent pattern, year to year in the price reductions and price the cut your prices more in the fall, you want to move the house before this summer. And then what we saw in this year, last year, price reductions never climbed in the fall because people kept buying right through the winter. And then they fell and so we were nationally at like 15% with price reductions were 35% is normal. Now, only 15% have to take the price cap because people were over bidding and doing all the things that normalize this fall, climb back up. And so in the fall that we were looking at price reductions in 27 28% range normals, 35 last year was 26. So we were like getting more normal, but all of a sudden this winter, it's coming back down and so it's one of the leading indicators for us. It says demand is actually picking up this Winter before the holidays, and we're looking like first quarters kind of got that that demand baked in already. So price reductions is one that we look at. And it'd be really fascinating to see if we could correlate that in in this, you know, to those two time series. So with your like your quick moving inventory, the other place will do it as we'll watch the cohort of properties that are listed each week, the new listings, and it's a fabulous wisdom of the crowds example, where the sellers and the listing agents, they know that the last house got a dozen offers. And there's, you know, 40 people at the the open house, so they price it a little more aggressively, they price their listing a little more aggressively. And so we can watch the inflection point in this newly listed cohort, turn very quickly and go steeper, when they're when when those sellers are adjusting. So all of a sudden, if there's nobody walking around the open home and you go to list your house, you put it in a little discount to make sure that it gets some attention. And so it shows up in that data very quickly. So those are the ones those are some of the ones that we're looking at. And right now, they look really strong for really, you know, it's like these are homes that are like just listed now, maybe they get an offer in January, it closes in February, or, you know, it's listing now and it gets an offer in February closes in March, and you hear about it in April. Like you can see it right now. And so it's we see so much of the beginning of the year already in that data. And it'd be it'd be really fun to see if we can if we can correlate that with, for example, the q&a number that you have,
Ali Wolf 36:43
and what you were talking about to us talking about how your data is showing that there's a little bit of an uptick in the market. Now from the retail point of view, we're seeing the same thing from builders, which is, and this kind of ties in a couple thoughts, as you said, how good are builders at forecasting? Well, normally builders have seasonality that they want to forecast in, like you said, any idea of seasonality blew up their forecasts in 2020, because that's definitely not what happened. This year, seasonality did return in particular June and July, builders thought it was over, like their sales really slowed down, it was a notable notable change. Now sales have come back, it is slower than like the heyday. But But what they see is that the seasonal pattern is showing up, but everything is to a higher level. So you may be a little bit slower than normal, but you're higher than what the slower than normal would look like, if that makes sense. So so just overall transactions are stronger.
Mike Simonsen 37:34
That's really Yeah, that's exactly what we're seeing in the existing data. It's the peak of the the frenzy was May, and that had backed off. And we could see it in a bunch of the numbers backing off a little bit later in the year. Hope we froze for a second. There. Okay. Okay. So yeah, so So peak, you know, we thought peak in May. And then back off like, June July, definitely looked like it was normalizing to us. And now it's accelerating again. Yes, exactly. Fascinating. Okay, so much stuff. What what are you excited about right now? Or is there something that you want to do that you're looking forward to or something else you'll want to make sure we hear about?
Ali Wolf 38:23
Sure. So it's probably something like you may have seen on Twitter today, we had a big release of new data this morning or not from the start, but from from vonda's point of view. And it's something that that we've really struggled with, because if you look at so so it's called The Zonda affordability ratio, bizarre. And we created this, because when we talk to builders, and we talk about affordability, they will say, our locals, a local person in Phoenix is struggling with affordability are out of towners, or people from LA thing it is dirt cheap here. And it's interesting because the post office change of address data isn't capturing as large of an effect as what we hear on the ground. And I think it's partly because inventory is so low, that you don't need that many people to move, to drive up home prices and to really influence the price of a market and to be a notable factor. And so what our Tsar does is we look at so a normal measure for affordability is looking at the percent of households that can afford the medium priced home. And the problem with that, in our in our belief based on our conversations with builders is that it's not capturing the LA income. It's not because when someone moves, their income often stays with their employer. So if if you move to Nevada, you live in California, your income is likely going to be coded in California versus Nevada. And so that's making it hard to look at incomes even though you've moved. So anyways, a long way to say you We've created the tsar to account for what we think is more of the true demand in the market where in some areas, affordability has actually gone up, based on compared to where it was before, you know, from from the data. In some markets, affordability has come down, because you do have some people that have moved and not everyone's moving because they want to buy a huge mansion in a lower price area. So people are moving for other reasons, family reasons, whatever it may be so so we're not biased one way or another. It's not only to push up affordability, it's just trying to get a better sense of it. So I'd say that's something I'm very proud of. And I we shared today, and I've had a lot of messages from builders that have just said, this actually feels intuitive to me, because we do have so many people from out of out of metro or out of states,
Mike Simonsen 40:41
right. And and in the last 2018 20 months, that was certainly accelerated, we call them the Zoom towns, my friend Connor sent from bluebird called the Zoom towns. Do you think that Zoom town phenomenon where, you know, we're moving remote we're moving from LA to Boise is that one of the things that we've observed over the years is that every year available inventory of existing existing stock declines, the available inventory declines. And as generally as rates have been low, it's been a really good deal to buy my next house and keep my first one for investment property. And so I have, so now I have two properties. And we've taken like 8 million homes out of the resale stock, and turned it into rental stock over the last decade. And so each year, we can see that the next year's inventory lower. And do you think that the the change of address info, maybe didn't reflect the migration it as much, because a lot of what was happening is just I'm not sell I'm not actually moving? And I'm buying a second house?
Ali Wolf 41:53
I think that's a very interesting question. And I so if you were gonna hold on to your existing home, you probably still do like a Florida dress, though.
Mike Simonsen 42:04
Yeah, depending on where you're feeling is the paid home?
Ali Wolf 42:07
Yes, yes. So I think there could be something, there's got to be something there, because we're hearing it directly from the builders, we're seeing it directly in their data. So this is somehow those two things are not are not coming together. And it could be what you're talking about is maybe it's the existence of multiple homes of second homes. That could be so that could be your point, too, is that if you hold one home, you buy a second home, maybe you're not going to change your address to your second home, but you're still going to spend a lot of time there. So yeah, I think there are a lot of factors that could play into it. But a good way to think about it.
Mike Simonsen 42:36
Yeah. And we noticed, for example, that that Boise, one of the boom zoom towns had when we looked at for example, our price productions number Boise is normally in the 40% range, a Boise was down at like 7% in April or May had nobody because you're coming in as you point out, you're coming in from LA, you're like, I'll pay whatever doesn't matter, whatever you want. Right. And but that slowed down this fall significantly, and price reductions in Boise got back up to their normal 40% range, again, significant. So what that says to me is significantly fewer zoom town migrations and or possibly, you know, there there, there was a price limit, where all of a sudden, it didn't feel right anymore, and buyers got censored, and the locals were like, well, let's see what these you know, idiots from LA are gonna pay. And all of a sudden they say, oh, there's a limit. Maybe there's something like that happening.
Ali Wolf 43:35
That's so important, I think under discussed is when you think about it, even if you just use it. I know we're making this California focus. And that's that's not the point. But if you are thinking about Orange County to Riverside, so a lot of people moved from just more coastal California to inland California. But prices in inland California have gone up so much that to your point, is there still that value play do people before you were moving because you were saving $200,000? You got more home? What if it's only $50,000? Now, do you want the commute? Do you want to do want to change your lifestyle? So I do think there is a threshold even if you have not unlimited funds, but you know, pretty sizable funds, you're still gonna do waste and equation you're still going to be thought like smart about your your decision of where you want to put your money.
Mike Simonsen 44:22
Yeah, the the arbitrage goes away, right. Like it evaporates. Yeah. So that's really fascinating. So I will looking forward to seeing more on the czar that the affordability ratio is it does that tell us right now off the top your head? Are there are there are there markets that look particularly affordable, surprisingly affordable by that by your ratio?
Ali Wolf 44:45
Here's the problem. So I love bizarre because like I was part of creating it, so I'm always gonna have to love it. The problem is, I'm born and raised in Cleveland, Ohio, and in Cleveland, there are more affordable homes than most elsewhere. In the country, but I have a friend that owns a house and she bought a house for $90,000 recently in Cleveland, but she was willing to do like a down and dirty house, like she wanted something that she didn't pay much you want a low mortgage payment. I know you want to live in a very good part of Cleveland with a good school district close to the highway, you know, a nice sized home, maybe a new home or a nice existing home. That's not fully captured in Azhar. And and and that's not just my index, that's anyone's index. So what I would say is, Cleveland is our most affordable market. And I do think you can get bang for your buck. And that's the same with a lot of areas in the Midwest, but it but in the Midwest, in Atlanta, in a lot of markets, you have such a big gap between your A and your F locations that your market average gets a little bit funky. And so I caution that one nd index, but but the Midwest is still the most affordable across.
Mike Simonsen 45:58
Yeah. Okay. For sure. I, we did some work with affordability as in retrospect with after the big bubble burst, where you could, what we noticed is there is a relationship, you know, have, you know, the basic affordability, B median income versus median price, and generally, median price median income goes up the ones that the markets that were most risky, the ones that adjusted down most were those that we could plot available inventory, per capita, or people per house, basically. And what we would find is that there's a pretty linear relationship. For for, like, if there if you have fewer more people competing per available house prices up, doesn't matter what the income is. And so when you could look at like Vegas, started to get out of whack when, when the inventory per capita started climbing, and then the prices that now is getting expensive, but the inventory per capita was was super high. And so in retrospect, you go, that's the one where affordability matters. You're in Palo Alto, it's a city of whatever, 70,000 people and there's 14 homes for sale, it doesn't have to be affordable to the median income, isn't it for 14 people. Like that's it. And so it can be forever on affordable in a place like Palo Alto, but when and so one of the things I noticed now, though, is because inventory is so low inventory everywhere in the country, Vegas looks, you know, now with inventory in like the Bay Area did 10 years ago, like it's, it's so inventory on that, on that old scale is is see like everything inventory per capita is is lower. So yeah, it was, it was like, you know, the question is, when is affordability a signal of the market maybe going to fall. And so by looking at inventory per capita, that was how we were able to discern it.
Ali Wolf 48:04
So you brought up a couple really big points there. So when we look at the payment to income, and you use Northern California as your example, we also, and this is not just our indexes a lot of different or affordability numbers. We know that there are a lot of people that have shares or that have supplemental income that's not getting captured in their income. And so in those areas you had talked about earlier up in Northern California, I think you were talking about in the past, like last cycle, but you talked about how a lot of it was people that were able to cash out something from from their stocks, and they were able to purchase homes, that's going to make those markets look worse and affordability index, because income doesn't capture wealth. And so we have to be acknowledged those limitations. I think those limitations are there. And I think the second point, which you made is that when does affordability show an inflection point. So I started by telling you in our index, the Midwest is the most affordable. But what I didn't tell you is that when we talk to builders, and we look at our survey data, buyers in the Midwest, are the most cautious. They are the most afraid of buying at the top, they feel like they have the most hesitancy and that's because the Midwest is now expensive relative to the Midwest. Midwest is cheap, US Midwest is not cheap, like it was in the past to the Midwest. So I think that becomes this whole different layer because yes, it looks like that, but perception is jeez prices have gone up 15% prices don't go up 15% in Cleveland,
Mike Simonsen 49:35
yeah. Wow. That's fascinating. And therefore even though they're they are more affordable relatively nationally, there's actually some risk there. Because people are sensitive to price change. Wow, that's really just really
Ali Wolf 49:54
is different by markets. You talk about the inflection point. I just think it's gonna be because in those cases there Way higher affordability ratio than where you're located. But I don't think your markets at an inflection point, we're not seeing it in the data, at least from the builders, but maybe in some of the areas. I don't think the Midwest is at an inflection point now, but I do know that there's more heightened consumer jitteriness than you would see in other areas right now.
Mike Simonsen 50:17
That's really, really neat. Okay, let's let's bring it to a close. So 2022 No, like there's some risks out there. But as of right now, we're trains on the tracks for the year.
Ali Wolf 50:31
I love that you said as of right now, based on what we know today, yes. If interest rates rise only modestly. Yes.
Mike Simonsen 50:37
Yeah. Great. So Okay, where can people go to connect with you or follow you on social and find out more about Zonda?
Ali Wolf 50:48
Sure. So go to www.zondohome.com No, zondahome.com. I am on Twitter @Aliwolfecon. And I'm very active on LinkedIn as well. So you just look for Ali Wolf with Zonda and you'll find me there.
Mike Simonsen 51:05
Terrific. Ali. Such a pleasure to have you. Thank you for joining us on the Top of Mind podcast. I really appreciate your work and and I'm glad we've got a chance to to connect conversationally and maybe face to face sometime soon. So thank you so much. Thank you, everyone for joining us on the Top of Mind podcast and stopped by Altos Research or Zondahome.com to get more data more information on both what both Ali and we are up to, and we will see you next time. Right here.
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