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Mike Simonsen

Mike Simonsen is the founder and president of real estate analytics firm Altos Research, which has provided national and local real estate data to financial institutions, real estate professionals, and investors across the country for more than 15 years. An expert trendspotter, Mike uses Altos data to identify market shifts months before they hit the headlines.

In this episode of the Top of Mind podcast, Mike Simonsen sits down with Kevin Oakley, Managing Partner at Do You Convert, to get insights into what’s happening right now with new home construction. Kevin discusses the impact of the pandemic on the new homes landscape, the affordability challenge with new homes, which markets will see inventory rise as new homes hit the market, and more.


About Kevin Oakley

Kevin Oakley

Kevin Oakley is one of the most trusted names in new home marketing to builders and developers across North America. He has over 17 years of experience running marketing and sales operations for home builders of all shapes, sizes, and areas of expertise, including at NVR, Maronda Homes, and Heartland Homes. Kevin is now a Managing Partner at Do You Convert, which is a leading provider of digital marketing for home builders.

Kevin’s background gives him a unique perspective on the challenges of today’s market. He’s the Author of Presale Without Fail: The Secret to Launching New Communities with Maximum Results. He’s also the Host of the Market Proof Marketing podcast.

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Here’s a glimpse of what you’ll learn: 

  • How the pandemic reshaped the home building landscape
  • The impact of record-low consumer sentiment on the market for new homes
  • The latest on what’s happening with supply chain issues
  • Why new homes are often hit harder by economic downturns
  • Which markets may see a spike in inventory when new homes hit the market
  • The challenge of affordability in new home construction

Resources mentioned in this episode:

About Altos Research

The Top of Mind Podcast is produced by Altos Research.

Each week, Altos 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.

Schedule a demo to see Altos in action. You can also get a copy of our free eBook: How To Use Market Data to Build Your Real Estate Business.

Episode Transcript

Intro  0:02  

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 and doers in the real estate industry. For a few years now, we've been sharing the latest Altos Research market data every week in our weekly video series with our new Top of Mind podcast, we're looking to add some context to the discussion about what's happening in the market from from the leaders in the industry. Every week, Altos Research tracks every home for sale in the country, all the pricing the supply and demand all the changes in that data and we make it available to you before you see it in the traditional channels. People desperately need to know what's happening in the real estate market right now. It's been so hot and so competitive, and now suddenly, the landscape is changing. So visit for a free consultation, how you can use market data in your business, whether you're an agent, broker, or investors and traders, all kinds of people are we're working with all kinds of people to help understand what's going on right now. So, without further ado, let me introduce my guest today. Kevin Oakley. Kevin is a managing partner at Do You Convert. He's one of the most trusted names in New Home Marketing to builders and developers across the country. We he has 17 years of experience running marketing and sales operations for home builders of all shapes and sizes. All areas including NVR Miranda, Heartland Homes, Kevin is now a managing partner at Do You Convert, which is a leading provider of digital marketing for home builders. And we'll talk about Do You Convert a little bit, but we're really looking, we're talking about homebuilding in general today and the future the homebuilding market, and the trends there. Kevin's background gives him a unique perspective on the challenges in today's market. He's the author of Presale Without Fail: The Secret to Launching New Communities with Maximum Results. And he also hosts the Market Proof Marketing podcast. So we're going to talk about new construction, about what to expect as especially as his housing market suddenly looks very different from a few months ago. And Altos we don't specialize in new construction. And I personally, it's kind of outside my personal area too, because it's, it's kind of funny, I don't live in places where they build new homes, so I have a ton to learn today. So, Kevin, welcome.

Kevin Oakley  2:50  

Hey, thanks so much for having me, Mike, and really giving the two of us an excuse just to hang out. And you know, we'll hit record and let everyone else listen in. But I'm looking forward to having this discussion for the same reasons. I'll be it from the other side, as as you are. And I always hear the skeptics and the naysayers in the back of my mind, because I know my audience so well. And one of the one of the questions would be what is a marketer know about business in the traditional sense, if you run an agency and your job is to drive traffic and run ads? Do you really know the intricacies of a business? And that's where the background both in in where I come from working for homebuilding companies, again, of all shapes and sizes. And it definitely helps. And the other is that Do You Convert, we actually work it in the kind of what I would call the full stack of the homebuyer journey. So we help builders get traffic to their websites, we help them with conversion. And then beyond that, we start working with them inside the CRM and inside sales roles, of what how do we respond to those leads and inquiries when they come in. And so we don't just get data in terms of traffic and clicks and cost per per 1000 impressions, we're also able to look at kind of that whole pipeline one. And so having having that full view means that we don't just focus on things that cause noise, but things that cause sales, and when sales and appointments aren't happening, we dive in and get in, in deep with with our builder partners on that stuff. So both from background and what we do every day, we're not just talking about driving traffic, we're really focused on on getting appointments and sales for builders.

Mike Simonsen  4:26  

So and that perspective is actually really powerful right now. Like I'm interested in talking about like what's actually happening with the leads and the sales for for builders along the way. And you actually have prior to do your convert you were you were running some of the builders. Yeah, yeah, I

Kevin Oakley  4:46  

was a director and NVR had two different homebuilding divisions that reported into me. So from a construction service warranty, land development, all those pieces together, and NVR, if you're not familiar is widely known. as probably the smartest homebuilding organization when it comes to using every dollar appropriately, there's there's skeptics who say they're run by accountants with spreadsheets, and they're not necessarily the most innovative, but their earnings per share and their stock market price and their consistency in all markets. It was definitely a place to learn from so yeah. What's going on right now, Mike? Is consumer confidence summit index, sorry, the consumer sentiment index from the University of Michigan all time low. And what happens for consumers when that sentiment gets that low is they don't start thinking further out. Just as an anecdotal piece, I've been asking all the builders that I work with, for the last two weeks on calls, what are your big plans for 2023? Personally, think about vacations, you think about purchases? What's what's going on in your immediate future? And the first reaction is like, oh, yeah, 2023 isn't that far away? Is it Kevin, and then the second one is a blank stare of, I have no plans. And that's a that's really a negative impact to home builders, because home builders have to always forecast into the future. And if you're familiar with the bullwhip effect, as a concept, you know, home builders have had to take current data and project increasingly further out periods of time to build a to build a new home and in the best of times, was going to be somewhere between three months and six months. And now for many builders is 12 months to 14 months. And so the feedback loop in the system was that if if a prospect was on my reservation list as a builder, that got me really excited, and I saw hundreds of people just waiting to be notified when they could purchased, which told all of my inputs, start as many homes as possible, build as many as possible. And in many cases, don't release them for sale. Because my costs are unknown. So in the first few months after the pandemic, when sales took off for homebuilders, everyone got very excited. They saw great margins, and then the price increases came, and the labor invoices started doubling. Everyone said, Wait a minute, this isn't gonna work. So you got this two sided monster happening where consumer demand has dropped dramatically for most of the country. And we can talk about some state and region specific things for builders, at the same time that we have more homes currently under construction at one time than we've ever had in history. And that's causing a little bit of a standoff where unless you're, you're offering new homes, sub $325,000, even incentives around interest rates that might bring back your payment close to march 2022 levels, the buyer is still not moving on that, which tells me that in many cases affordability is is an objection or something that the consumer feels compelled to talk about. But if as the home builder, you're saying, Here's a tool to remove that objection, and the consumer still doesn't want to move forward. There's something more going on. And that's why I keep pointing back to that Simon index as being really important.

Mike Simonsen  8:03  

Wow. So we got to jump right in, we got a tonne of stuff. And I'm frantically taking notes as we're talking. So the consumer sentiment index at the University of Michigan one is all time low. It's wild, right? economy's actually growing probably employments ultra low employments ultra low. People have cash like, but yet, like everything's pretty good. Yeah, sentiment is worst ever. Yeah, wild. So we have that to deal with. We have and then it sounded like a make sure I get this right. The signals that the builders are getting were and have been getting probably over the last year was we've got tonnes of buyers build as much as you can. But we have uncertain costs. So don't actually sell them. Until we lock into we know the costs. So we were the signals that the builders were getting were were build, but don't sell it yet. Yeah. Wow. And build up. Right. We saw the build up of those. And it so you know, as you said, we have the most new homes under construction we've ever had.

Kevin Oakley  9:15  

Yeah. And then Dr. Reports, Dr. Horton just reported that their cancellation rate I think went up to 24 25%. So when you're talking about a home builder that builds 85 to 90,000 homes a year, and suddenly every every month, they're they're seeing or are projecting to continue to see 25% of those sales return to them. That means you have to, I mean, it's just like stock market goes down. 10% It doesn't mean going up. 10% gets you even that's the law of percentages, right. So yeah.

Mike Simonsen  9:45  

So that's wild. So So then now we have we had those and you said you said sub 325,000 is moving

Kevin Oakley  9:56  

Yeah, in most in most markets again. The markets were really, to me that's the litmus test of affordability is being talked about by everyone as the main challenge. Yeah. But my reason would be that if someone could afford a half $1,000,000.07 $100,000 home in March, there's financing products available to make that home affordable now, but they're still choosing not to move forward. And I think mostly affordability damage was done through actual price increases of pricing and not I mean, financing has certainly been a problem. But But there's more ways to maneuver around financing for the fluent customer than the base price of the home itself.

Mike Simonsen  10:34  

Got it? Yeah. And you can you can see how that's the as he's point out, that's the the consumer sentiment, like, everybody, like they think the economy is already bad, even though it's been pretty good, and the outlook is bad. Yeah. And

Kevin Oakley  10:53  

all the all the places that stress comes from for the average consumer right now, Mike, and let's say that you have financial means that historically would have allowed you to solve those same challenges. What's What's crazy about today's world is, it doesn't really matter how much money you have. If you're flying through Europe, you've got a 40% chance of actually making that flight versus it being cancelled, it doesn't matter unless you're going to fly private, which is a whole different scale of financial security, you can't solve a lot of the challenges and sources of stress quickly or easily. And I think that leads to some of the sentiment issues that we have have. And then also when it comes to I put this out on Twitter a couple days ago, a new home is always a luxury. Having a home having a roof over your head is not but a new home, is always a luxurious option for the consumer. And if if you don't have margin in your life from a financial perspective, and we're seeing credit card level and usage rise, if you don't have financial margin in your current living situation, the chances that you're you know, thumping on the desk with your significant other saying, we definitely need to consider a new home right now, that will likely cost a little bit more again. And so that's what I think is most interesting is historically there is a connection between the amount of website activity that we can drive to homebuilders website, and the number of appointments and sales that are a result of that. And in most places for most markets that has bifurcated, most people would be surprised to hear that website activity for homebuilders is actually about 2% higher than it was a year ago, in a 3030 day period. But conversions people interested in taking that next step requesting information scheduling an appointment price now to home is down almost 25%

Mike Simonsen  12:42  

Yeah. Okay, so so people are still interested, but they're not taking any action. Here's a question on that, on that data. When is when? How often can it reset. So for example, much home buying activity is seasonal. And in the Altos data, we have real strong seasonal trends. And so one of the things that I'm looking for, for example, as we track inventory, you know, when we, when we've been having inventory climb steadily each week, since early March, and then pretty rapidly and by some measures, you know, most most rapidly increasing in, you know, over a decade, maybe since the financial crisis. So that's inventory. But by the time you get to like, October, inventory typically curves and and, you know, starts falling back for the holidays, resets middle of January and starts climbing. Yeah, that's a typical seasonal curve. So if I watched inventory, keep climbing in October. Like that's gonna be a real signal that next year is is not we're like we're, we're going down further from here. So So that's, that's a seasonal pivot point. I can actually probably see some late July, early August, like we expect five to seven more weeks of pretty rapidly increasing inventory. So then by mid August, you see we are late August, if it's still steep, that's a signal. So on your home on your new home web traffic to sale ratio data. What's the seasonality reset that we can look for there?

Kevin Oakley  14:26  

Yeah, the seasonality reset in new construction has always been similar, but just a couple months earlier than existing. And that that kind of makes sense because if if a home is going to be under construction, for example, the new home selling season typically starts waning about the time that the existing home selling season is really taking off. So mid May new home sales are going to reduce maybe because additional existing home inventory hits the market and that competition reduces but also, again, the consumer has to think proactively in most cases further out than they do on an existing home. On purchase, and so we would typically see a return, jump up, maybe as high as 10% in September, October, and then a clear decline through, you know, the day after Christmas or January 1, and then accelerating into the Superbowl. So it's similar but different. But I think, again, what's really important for your audience to understand who might not be as familiar with new construction is home builders typically bring on new communities and new phases of existing communities, additional land inventory, right before the holidays. There's lots of reasons why. But inevitably, if you live in a colder market, every year everyone's talking about well, we may or may not get that phase paved before the plant shut down. due to cold weather for for paving. Yeah, it's just a race. And so the inflection point of what will builders do, because the stress level could go exponential, if they still have a lot of unsold inventory in existing phases. At the same time that a lot of new offerings are going to come to the market, they're not going to be building speculative inventory on it the same way they have been most likely. But But then if if if both those things are hitting at the same time, and then that return to a strong market in January doesn't happen. That's when you'll see home builders really freak out at a different level. And now the narrative is generally the narrative right now Mike is generally it seasonal like seasonality return to the market at exactly the worst time for builders but July are inside joke in our in our world is June or July is going to suck if you're a homebuilder, we just don't know which one, but every year, historically, that's a month where your if your sales goals haven't been cut in half, you're not going to hit your sales goal.

Mike Simonsen  16:39  

Interesting. So that's, there's a there's a real steep seasonality to hold, though. And, and it happens. It's happening right now. That's really like I'm looking at that in the Altos data to do like, this is the time of year when inventory climbs weekly. And usually we can see it rounding the corner by now. And it's it hasn't really notably rounded the corner yet, but still climbing. And so, you know, how much is that seasonal? Some of that seasonal? Some of that's counter seasonal, and you know, the time and it's the you know, worst that consumer sentiment ever. Yeah. And some of that will reset in January. So that'll be really fascinating to see what what happens starting January like, oh, okay, we have some.

Kevin Oakley  17:27  

I also think people keep missing. We talk around each other. For those of us on Twitter, especially, I talk about the housing market from a homebuilder centric perspective, which I know is the minority and wrong. So I always have to clarify that. But an increase in inventory levels can be healthy for the existing home market, but incredibly detrimental to the new home like the head of nhB came out in an interview with Bloomberg last week and basically just said, new housing is in a recession of our own industry right now. And so when people talk about a return to healthy levels of inventory, that first question is at what price point is that inventory? And are homebuilders able to compete with that price point? Or is the demand and the price point that homebuilders can offer?

Mike Simonsen  18:14  

Yeah. So the actual shifting price points is something we should hit before. We before we wrap up today. We got so much to cover the what? Let's still shift. So you mentioned the NAHB the Association of Homebuilders. Their sentiment came out as with the biggest drop, ever one month drop ever in their sentiment, they went from super hot to not hot in one month. So we've been talking about the consumer sentiment. Let's talk about the homebuilder sentiment.

Kevin Oakley  18:52  

Yeah, stress stress is real. You got a dichotomy between the public homebuilders which are generally well capitalized, much better capitalized than they were going into the great financial crisis. And so this is probably going to be an opportunity for them to continue to gain market share, to bring margin and pricing down. And how that has an effect on the rest of the market. We'll see. But a lot of people in our industry would would say that don't be surprised at all, if kind of the first round of of average sales, price reduction, as targeted by those puppet builders is 10 to 15%, which would just get us back to like late 2020, early 2021, maybe on some pricing, but when you say as a percentage, you're like, oh my gosh, that's a lot for the medium and smaller size builders. That's where the majority of that negative sentiment is coming from. These aren't builders that we work with, Do You Convert but other other builders all talk it's a very small industry. So I know of builders in Boise who were selling 3040 homes a month that haven't sold a house in 60 days. I know builders in Austin, Texas who didn't sell a single home in May, and then went negative in June due to cancellations. And again And the narrative from a lot of people on the existing side is this is actually good signs for return to a more healthy, balanced market. But additional supply over the next couple of years is primarily going to come from what we call build jobs where a customer knocks on the door and says, I would like you to build me this floorplan plays Mike, with these options at this price. And so one of the one of the indicators we're about to see is like the DC metro area is a much lower speculative inventory market generally. And they're already forecasting and decline and permits, because they're not going to build unless they have a contract as much as other parts of the country. So sentiment is low, because everyone has PTSD. Still, from the great financial crisis, they know that they built too many unsold speculative inventory homes, and then again, somebody that never really happened to the same degree, not releasing them for sale until they hit drywall, where they're still 6090 days away from being totally finished, has given complete lack of ability to feel where the price points should be, he can't feel the earth beneath your feet, I just said I've been flying high. But price discovery when you don't have a point of reference is really, really tough.

Mike Simonsen  21:12  

That's fascinating. I didn't realise that, that the cost structures. Were preventing that signal for them, and actually incentivizing them to not sell like I can imagine, you don't know what our costs are going to be early on. And so we can't price it, or where you can we we don't want to take that risk. But I didn't think about it in that scale of impact. But

Kevin Oakley  21:38  

let me just give you one more anecdote. Again, I mentioned the bullwhip effect. But if if if I have 400 people on an interest list for my community, that reduces my fear and starting that speck of inventory without selling it. But what builders didn't realize was that the person who was on their list was on five other lists to they're only going to buy one house, but they're on five different lists. And so collectively, everyone, and it just goes further up the chain. And that's all we saw all the different spikes in materials just orders many garage doors and windows as you can, because we have the demand. But then what happened right about early June, late May was builders going through that list and saying, Congratulations, Mike, it's your turn you can buy. And those wait lists and interest lists having shockingly I mean, you had 150 people on the lists, and maybe sold two homes recipe for that that would have been 150 sales in the bank.

Mike Simonsen  22:29  

Yeah, that's that is a big shift. So. So maybe this is a good opportunity to talk about what you think will happen in 2023. To new homebuilders and the consumer. You know, we have we have some macro trends that we know are happening. And then we have some real specific things that we're dealing with right now. So what do you see?

Kevin Oakley  22:57  

Yeah, well, again, if you go back to that consumer sentiment index from university, Michigan, one of the really encouraging things about that reality is that at the lows, it never flatlines and stays there. Typically, within three to six months, you get a return of 50% or more, back to the previous high, sometimes even get back to that high. So I think what's going to happen is that builders are going to slam on the brakes from from additional starts, there's going to be a lot of pain. And again, it was only a quarter ago that all of the national builders and we don't have to cut price. They're going to have to adjust, adjust pricing and work through that inventory. But then we will be on the other side of that immense pain. Back to a point where supply and demand are off balance. The big question about how 2023 will go is how quickly builders can reconfigure their products and offerings to hit price points that truly are affordable. So talk to a builder, North Carolina, who's been around a long time, and this was a two month ago conversation where he was like, Yep, I hear you, Kevin. And we're going to roll out two bedrooms, single family home designs, which we have never offered before. We're bringing back carpet standard in the dining room. We're looking at laminate countertops, and we'll let people option up but we've got to do whatever we can to drive that starting price point down to the extent that builders are successful in in adjusting product and renegotiating. And this is where the bill to rent piece comes in. That's been a really strong sign of the market. Lots of money addressed to that. And if if that if that continues to be really strong and doesn't allow the new construction market to reset in terms of material costs, labor costs and land costs. That was the bright side of the great financial crisis is builders who made it through bought the land that they were still selling from, in many cases up through 2018 2019. Right. So that reset needs to happen for us to get back to a healthy new construction market.

Mike Simonsen  24:53  

And so are you seeing the builder rent industry that the really it's big Wall Street money is Is, is probably may prevent the reset from happening or may really

Kevin Oakley  25:05  

hope not. Yeah, it might because not too long ago, there were articles and feeders going out from these companies saying, hey, any homebuilder who doesn't want to buy a piece of property that you've you've you've gone into contract on, you don't want to close on it, we'll take it and we won't even renegotiate the deal, we'll just take it was just taken. So if that kind of situation happens, where you know, that reset doesn't take place, because there's another pool of money, just saying we'll take it, because we still just don't have the bandwidth the the velocity that we need, that could cause more pain. Now, again, it brings on supply of a house. It's just not an owner,

Mike Simonsen  25:40  

what does it and does it may be like right now, when you think you when you think about the builders who are selling 50 a month, and now they're negative two months later, that's, you know, mid 10s of millions of dollars of revenue shift. And so that sounds catastrophic.

Kevin Oakley  26:02  

I think I think I would not be surprised if those same builders I mentioned, continue to struggle as poorly or as much as they have been for another 60 days. Okay. And I think it's, it's the people who are on 60

Mike Simonsen  26:16  

days, 60 days, but not, not 24 months. No. Okay.

Kevin Oakley  26:21  

No, yeah, but that's going to be because that pain is going to force man a lot of builders still have margins. Historically, a home builders goal, especially at Publix builder is 10% final net margins, which means you have to sell the home and make in the in the low to mid 20s At minimum to hit 10%. Net. In the pandemic, there were builders in the in the low 40s. And there still are builders trying to sell their homes and having little success in the mid 30s. So it's they have the opportunity it's it's just there's still disbelief and and we'll see how it pans out. That there still is almost no completely finished inventory for home builders around the country. When I asked the 65 builders you work with how many of you in any one market have more than 10 completely finished single family homes? Almost no one I think there's two that replied back Houston and and one other market that I can't think of without my head. So when a home is finished, as long as the price is reasonable, it's still selling at almost any price. The problem is that that builders are looking at this flood of homes that have been delayed and delayed and delayed and their fear is it's all going to hit at one time and not be sold. So markets like Austin, you're starting to see that come to fruition

Mike Simonsen  27:37  

for sure. Yeah. And the the those two markets, Salt Lake City, also the big inbound migration markets, especially from California, during the pandemic, and then that's stopped in a big way this year. The and we can see those in, in the Altos data with you know, the with the percent of home second price reductions. And we can we can watch those climb in, they are climbing the most steeply to the highest levels in those markets. Like it's exactly

Kevin Oakley  28:10  

again, that builder that I've referenced in Boise also, the owner said, but we've been selling at 40% margins for two years. Uh huh. And so we'll be just fine. But they are going to have to make changes. And again, because of the long term timetables in what we do, you know, pausing now won't really hit the labor market for another 60 90 days at the beginning and then you can start with but then those homes are starting construction until February. And so I know you're an expert on this, obviously your your you just came out with your predictions for the whole rest of this year. And in spring of next year. So your your

Mike Simonsen  28:46  

Yeah, are two, and it'll be real. I mean, and the new construction is a wild card for me. You know, we don't we what the way the Altos data and new construction works, we can see things move in tandem in pricing. You know, if I'm in the market for buying a home, maybe you know the new home, a new construction is the luxury purchase. But it's still it's still a pretty solid trade off. And so,

Kevin Oakley  29:11  

because so much as the housing stock is older and you don't want to live in a house with seven or eight foot ceilings, yeah, specifically if it's got popcorn on it. And so to be clear before we run completely out of time, while I think short term is extremely negative and painful for builders, there will be builders who find a way my favourite time in the business was when I was in Pittsburgh from oh seven 2012 which were not great years for home builders but but our company grew by 20% every year by stealing market share and so builders will figure this out. And again the big builders are much better capitalized. But But does that lead us to more consolidation? I know someone on Twitter asked if you know thoughts on other methods of construction that might need to come about and we're certainly seeing that in multifamily. In particular, there's an amazing company called volumetric building systems I think is their name and many manufacturers During changes in the had been around really since the 50s, when penalization went mainstream have constructed wall panels, but builders will keep building the question is how many builders will be able to see the similar velocities as they have in the past versus having to maximize profit on each unit?

Mike Simonsen  30:18  

Yeah, and so Okay, so this is actually a good segue that thinking about new construction types and and I'm interested in when we do these interviews, I'm I'm very much interested in your view of the future. And some of the, the macro trends that we've been dealing with are. So we talked about cost of building and we've talked about the the price point that the homebuilders can deliver at that price point has been climbing a tonne. And that in the cost, so part of its cost part of its margin, but, but the costs have been materials costs and also human costs and that human labor shortage and it has been dramatic, I think for for homebuilders, especially post 2016 When we lopped off immigration. So is that is is does is Labour still a problem there? Does it change? Does? Do we see anything changing there and maybe do things like like new construction mod, you know, approaches, they allow us to be less labour intensive in homebuilding over the next decade, what are some things

Kevin Oakley  31:30  

for us to help sell and buy? I think one of the trends is going to have to allow for that is the is the consumer relenting on the idea of personalization, which is a big force pushing back in the other direction, that's why multifamily I think has is going to lead the way on this. And there's, there's homebuilding organizations in Japan, where everything they do is manufactured. Yep, completely different market and reasons why. But when I say, give up on the idea of personalization is HGTV and and what people expect, if they're going to purchase a home in terms of being able to personalize or make selections, it can absolutely can't be curated to what the majority of people want. But what the majority of people want, and what they can afford, has probably never been, again, further apart. And that's, that's where the builder or developer who finds the strength to say, we're going to look at the affordability level and build whatever that is. And that's where most of them are uncomfortable with that, again, suburban developer in Atlanta, bringing out a one bedroom Townhome. It's like, no one's gonna want this, this is nowhere in the marketplace, but then they sold out because it hit that affordability and a price point that and that's that's the challenge of of manufacturing in different methods is the amount of variety of options that you truly can't like you can you can offer them, but then it breaks apart. Because when you fully assemble something in a factory and then drop it off on the job site, and it doesn't fit exactly right. And a big trade off there is you're going to hire less skilled labor to put those pieces together generally. So when things go wrong, they go horribly wrong often. And the more variety and how it could go horribly wrong. Again, that expense on an Excel spreadsheet and profit margin you think is going to be there can change on a dime, let alone the customer experience.

Mike Simonsen  33:23  

Yeah. That's fascinating. And so you think that some of that is a reason why that many maybe, maybe the homebuilding industry has been maybe slow to adopt some of the technological changes, it's still really pretty bespoke.

Kevin Oakley  33:38  

You think you think about like the 3d printing technology that everyone's seen with the with the concrete material is, is really incredible and exciting. But the majority of builders are building what is being requested of them to be built. Yeah, and the consumer is not walking around saying I would I would be willing to trade off any material selections in my home, for the sake of of XY and Z and also the, the manufacturing, the more you go into a true manufacturing process, one of the billers that worked for him or Rhonda, we switched to steel joists systems on the floor, out from wood, not due to cost, but due to at the time, the variability of material that the machines required. So you can't have just like a car, if cars are made out of wood, it'd be a disaster because you got humidity, expansion, contraction, all these things that can throw the machine off, and the robot doesn't know what to do. Yeah. And then when you have steel prices go through the roof. Now what you do as a builder when your whole system is designed, so not having the flexibility in the system is another another big challenge is replacing one wood material with another wood material on the job site one at a time is Yeah,

Mike Simonsen  34:47  

and of course, you know, no great no great market innovation ever came because the customer asked for it. Right? Exactly. So

Kevin Oakley  34:56  

economies of scale necessary to put it out in the world and say All right, we're gonna build 100 homes that no one asked for in a way that no one's ever asked for before

Mike Simonsen  35:05  

is scary get

Kevin Oakley  35:08  

people to bite off on that

Mike Simonsen  35:09  

yeah it's super scary but then you don't get your you know you don't get your Steve Jobs with the iPhone every once in a while you get a visionary builder you get an Eichler something who's, you know, decides to do that? And, and but that's, that's a real fascinating challenge. Okay, so So in this context of thinking about where the homebuilding world goes over the next, let's say decade, one of the arguments that that I love hearing different perspectives on is are we building enough? Are we under building? You know, we, we there are some folks like Ivy's element who are really smart, who have been talking about how we're not under building at all, what's your take on construct, like the total volume for the country?

Kevin Oakley  35:59  

Yeah, I'm much more on IVs camp than than anyone else. I, again, it's it's not that we don't need more homes. But we need homes at price points at home builders can't deliver. And so when you're talking about in a market, like we're I live in, in central Ohio, if the average new home is going to be half a million dollars or higher, all the demand and the lack of supply is on the starter home. Because the people who want who can afford a starter home, they have that demand, the investors want that because that's the lowest cost per unit acquisition that they can turn around into a rental. And so all of the demand is focused on this area that most homebuilders can't meet. And that's, again, why the single family build to rent move has a lot of momentum behind it. But I think that's what we're seeing is we have overbuilt to many high end homes. And again, the consumers definition of high end it only keeps getting higher, or lower. Sorry, it only keeps getting lower, right. Like, if you talk to the average young millennial, I'm an old millennial, we've talked to young millennial, you would say would you consider living in a home that didn't have granite and stainless and hardwood floors? Now, that's an entry level. That's, that's my expectation. Yeah. And so again, that's where the three invention I think is going to have to happen. And that's why I don't think that rising interest rates are going to help because most builders, again, the majority of the homes being built still are not being built by those public companies, by lots of small and medium humbling organizations. Those folks will not be building inventory unless people request them to build it moving forward if they have a contract. And so higher interest rates, while it might bring on more existing inventory, will not add more supply over time. So I think we're over building right at this moment. And then very likely, we're going to be drastically under built unless rates and affordability again get reset. So we're going to turn into renter nation, like like Rob Han talks about all

Mike Simonsen  38:00  

Yeah, is there? Is there a path to affordability in new construction,

Kevin Oakley  38:09  

unfortunately, not really. Because the amount of impact fees and and taxes and infrastructure that is put on home building projects means that in most cases, if the land was free, in most parts of the country, which land typically is the largest cost basis going into a new home, if the land was free, most builders around the country still couldn't offer a home below 300. So it's that that's where I keep trying to look for the light at the end of the tunnel there. But I think it either comes from again, an acceptance of home being less grand, maybe than it has before. But is that okay to tell, you know, the next generation that they can't have the same thing that we've all had, but But truly no.

Mike Simonsen  38:57  

Does that mean that starter homes are existing homes and the really the only way that new construction ends up is is in luxury, or high end?

Kevin Oakley  39:10  

Yeah, again, single family built for rent like it's not uncommon for those payments to be 1800 to $2,300 a month for a single family home. The finishes on that home are going to be probably less or more more austere, but it's not going to be a detached single family home product. And so there's a lot of Homebuilders are getting into that as a second business offering and then they're going to offer incentives for those people who are renting to buy a home from them almost like you're building equity while you're renting. Yeah, and other I think it's Divi homes that's that's doing that really interesting approach to we'll buy the home let you rent from us for three years and while you build equity then you buy it back from us at the at the original price you bought it but my hunch is that the government ends up doing something with with financing, you know, bringing the the four year mortgage to the rest of the country that you Californians have enjoyed for For so long, you know, Europe's talking about 50 year mortgages, and maybe that helps. But, again, if the cost part of homebuilding doesn't reset, then all it's going to happen is as soon as those programs get released, prices are gonna go higher.

Mike Simonsen  40:15  

Yeah, prices adjust to that. Yeah, those are really tricky. It'll be fascinating to see if we have some technological changes that can be adopted that the consumer likes, that actually helped bring that down, bring that cost down. We have part of the during the pandemic course we had skyrocketing commodity costs, some of those turn the corner and they're coming back down. Or they're costs on garage door like though garage doors and the lumber is coming back down has come back down. I don't watch it super closely. But is that right? Yeah, lumber,

Kevin Oakley  40:44  

lumber is come back down. That's great. But again, we work with a multifamily developer who pre sold a third of a 20. I think it was a 20 million low rise, urban infill project. And then they got the cost back and ended up being 12 that $12 million more. And they won't even tell them how much something like doors are going to be just like this is the cost and these foreign line items. We'll just see when we get there. Yeah. And so again, even right now, and this leads to the to the sentiment levels of builders, most builders are still seeing construction taking longer, not shorter, you're not seeing relief on that yet. And they're also continuing to get price increases sent to them. Now they're able to push back more than they have in some areas. And some builders are reporting that labor has come back around and said, hey, we'll do it for a little bit less this time to keep busy. But it's not the relief that we need in order to see that change that that we're all hoping for.

Mike Simonsen  41:41  

So fascinating. So so that's the neck. Can

Kevin Oakley  41:45  

I ask you a question? Yes, sir? Selfishly, because because I got the the existing home expert here, the one of the one of the bright sides could be that existing homes never returned to the supply levels of days of your. And that means that your only option in many parts of the country, once you've worked through this inventory caused by the bullwhip effect, then maybe that has a bright shot. It's shining opportunity for builders to, again, at elevated margins and elevated prices. But there's no other option than new construction.

Mike Simonsen  42:14  

Does that? Yeah, I think that's a real possibility. We we have we have, obviously, rising inventory now. But we're still half of what we were even in 2019.

Kevin Oakley  42:31  

Yeah. And the new listings that are coming on the good homes are still selling fast. Right.

Mike Simonsen  42:36  

Right. And it sounds like that's happening. That's true in new construction as well. Yeah, even today, even today, mid July, when or late July when we're recording this. And I think, well, this will go out really quickly here. But but so that's really interesting to hear. Right? It's and it's the right price points, the right places that are completed if they're going and so I do think it's, I think it's a real possibility that we have, I have a I have a vacation home in the mountains, and it's now financed at 2.8%. You know, if my mortgage payment on that is less than the rent I paid in San Francisco on a two bedroom apartment 24 years ago. Right? And so, like, I'm never getting rid of that, you know, like, why would I ever get rid of it and rents are still high, you know, in in Tahoe, maybe the reason you get rid of it is because the whole place is gonna burn, you can't get insurance. You know, there may be a risk there. But but but it's but it's like, you know, in the whole country is that way with the existing stock? So what's going to be fascinating to me is like, what is the the final natural rate of do I do a move and sell. And, you know, you could consider having a million homes on the market, existing homes on the market. At any given time over the last decade, a million would be actually low, but but call it a million, it might be 1,000,002 But let's call it a million more still just over 500,000 Right now it's climbing, it'll climb through the year and there's a real scenario where Okay, next spring, it resets and we come back down and we start the year in the 550,000 range. And and so we and because so at least until the boomers finally start dying and that then may be there because you know the boomers own everything. Yeah, and biggest transfer

Kevin Oakley  44:43  

of wealth right from ever in the US will be boomers but and most of that will be real estate as minors it will be

Mike Simonsen  44:50  

a big chunk of a big chunk of real estate. And so those folks will at some point that transfer has happened is probably three Five years, you know, in their 80s, like that kind of stuff is gonna end up happening. And so maybe at that point, we get back to more inventory. But like get back to our previous normal levels I have, I could imagine multiple years at higher interest rates. So each year, you know, what happens then is that the investor deals fewer than pencil out. So at a higher cost of money. So each year, instead of having more homes going into rental, we just said that, you know, people just sell them instead of holding on to him as a rental. So that adds, you know, active inventory back in. So a couple of years of that, you can imagine building us back up back to normal, or like maybe a big job loss recession, where like, you can imagine that triggering in there too.

Kevin Oakley  45:49  

And I think that's also opportunity for for home builders. I was talking to a builder this morning in South Carolina and North Carolina. And they just recently started offering in select communities only Mind you, the ability to select your floorplan and the options that you want in your home to truly build a house for a customer. And they're seeing strong interest in that because they're still, relatively first time move up some cases first time homebuyer price points. And that's historically been one of the reasons people choose new construction is they've exhausted the existing market options. And there's nothing there that that suits their needs, because again, a lot of all housing stock in the US and they say, well, I'll take 100 fewer square feet for 910 foot ceilings, energy efficiency, and smart home, and just the layout of the home that I want. So again, if there's if there's low supply, and the only homes that are staying on the market for a long period of times are the ones that are overpriced or just not not attractive, then that gives home builders opportunity to

Mike Simonsen  46:49  

do you notice a difference right now in somewhere like the Midwest markets, are they slowing but not as slow? Yeah,

Kevin Oakley  46:58  

that's super interesting. And I actually sent you some slides. We don't I don't think we have to pull up for everyone here. But we do have an aggregate data set of about now $18 billion of new homes that are sold a year of website activity and conversion data. So real time what are consumers doing on websites, it's about 2,000,002 and a half million sorry, users a month that we track visits to build websites. And the Midwest is I think, mostly due to affordability actually outpacing in terms of lead conversion. So the total number of people coming to websites is not as high as in the south or the West. But at a much greater extent people are willing to take the next step towards purchase. Whereas in places like Southern states of Tennessee to Louisiana, Florida, that conversion data is about 40% lower than it was last year. So lots of people looking, but way fewer people are willing to take that next step. And again, a lot of it has to do Mike with it's a blessing and a curse this inventories and finished with a customer looks at a homeless 90% done and again, highly skeptical, that that home will be finished when promised. And if it's not finished, what the hell am I going to do? Because rentals are hard to find short term rentals, forget about it. I've got an employee who seriously they're moving from North Carolina to Iowa, they they signed a short term lease agreement for eight weeks while their new home was being finished. The landlord emailed the day before and said Nevermind, I didn't countersign and I ended up giving your your home to someone for a year's lease instead. So you don't have anywhere to live. She checked out Airbnb options, she was thinking about getting an RV and parking it somewhere for for the time like there was a now she stayed in an extended stay hotel, which until yesterday told her she was gonna have to move out for the weekend because they had overbooked the rooms and would have to move back in. So with the consumers trying to juggle all of this and can't have faith of the home being completed. And they're just saying this is awesome. But I think prices might go down a little bit. And also I don't know when the home is gonna be done. And I can't have that much uncertainty in my life. So I'll just wait.

Mike Simonsen  49:08  

Yeah, and can you remember you how, how easily could eight weeks slipped to four months? Right. It could be like, Hey, we don't have the whatever this this component. We're not so yeah, that's a really, really fascinating part. I'm really I'm really fascinated about whether the dynamic that we have right now of the builder rents force, and whether that actually keeps a floor on price falls and inventory clog ceiling on inventory. And and and because there's a lot of capital there or whether that that stops and and then we have a whole new set of inventory crisis of you know hold this like we were building, assuming we're going to sell 40% of them to an investor group. And now we're not going to sell any of those. And oh, by the way, they're unloading the existing ones that they have. Like that could be as that could be a real negative scenario. If those guys that's

Kevin Oakley  50:13  

yeah, connected to that the thing that I've, if there's, because I, again, great financial crisis was my favorite part of my career, if I'm being honest, so that that part doesn't really make me nervous. The only part that's kept me up at night was thinking, all this institutional money that says we have zero plans to sell ever, why would we? What else would we do with that money? It's a great hedge against inflation, rents are gonna keep going up. But, you know, if, if your stock price drops 90% in a month, and you have to sell something, or other assets that you hold tank, and I think there's a real risk of this with what happened to crypto, and the potential of contagion there because Funny, funny enough, Mike, we don't hear stories about a lot of people buying homes with Bitcoin anymore or selling homes from Tik Tok. I don't know what happened to all those, but they've gone away. But But this idea of an institutional investor having to sell not because they want to sell, but in times of stress, you have to sell what you can. And and it wouldn't necessarily be a national problem. But in certain markets, that would be a whole different kind of stress. And we saw we kind of got a little sample of that when Zillow exited. I bind. No, it was no easy feat. It turns out to sell 1000 homes,

Mike Simonsen  51:26  

at the turnover still have some of them. Yeah, yeah. Yeah, that's that'll be really a fascinating, that's a wildcard it's it looks like right now that, that those, those firms are well capitalized enough that they're that they're not going to be on loan, it's not going to create a negative cycle, and may create a floor be really surprising if that, if that happens when we come out next spring. And all of a sudden, why is still not that many homes for sale. And you know, prices are here, they haven't adjusted down and the good ones are moving and the lousy ones don't anymore.

Kevin Oakley  52:01  

The other thing that that gets people confused as they look at pre GFC, the amount of homes being constructed nationally, and they think that was normal. Well, that wasn't normal. That was way more homes than were necessary, not just due to crazy financing. But it was a similar rush to get as many homes under construction. And so then we paid for that by by having home sitting home sitting in unsold newly constructed or having birthdays. I remember one of the one of the companies I worked for a home had sat for three years after it was finished being built. So So what was normal levels of new new home construction, I think we're a lot of people, I see our bias towards the return to 2005 2006 levels or, or somewhere in between. And I think again, the thing that I really appreciate about what IV keeps pointing us to is anything that provides a roof over your head is housing. And you can't just look at single family permits or multifamily permits are built to rent in separate buckets. It's all housing. And when you when you do that, with the demographics and the affordability issues, that's where I think she's right, in the short term

Mike Simonsen  53:13  

best faster. So let me get one prediction from you. And then we'll wrap up the or the the the the your guidance. So what is the right number of homes to build a year? Oh, and going forward? What what's, what's healthy?

Kevin Oakley  53:30  

My hunch is closer to like 1,000,001.2 1.2, which would still be a lot. Yep.

Mike Simonsen  53:40  

And a beat, right? Because more than more than we've been

Kevin Oakley  53:44  

doing 1.65 under construction right now.

Mike Simonsen  53:46  

They're under construction. Right? But but that's like they're stacked up for for a long time. So they so

Kevin Oakley  53:56  

if they're stacked up and when they become available, again, it's that it's that lag thing that makes it really hard. Does that then mean we only need to really build 750 In a year to catch up. Right? Or that's what we

Mike Simonsen  54:08  

are, is that catch it up from because we weren't for a decade 500,000 or 600,000. Right? So are we catching up?

Kevin Oakley  54:16  

I guess I guess my Asterix on my 1 million number would be all those homes again, are going to have to look different and be at a different price level and product type than they have been in order to maintain that. So again, my my million would include built the rent, yeah, would include, you know, not just traditional, you know, we think of as home builder activity

Mike Simonsen  54:37  

as a really, really great conversation. I appreciate your insight. Kevin is exactly why we want to have this like the talk because I don't know anything about that all those nuances of new home construction. So I really appreciate it and the marketing of it. So before we go, where should people find you and Do You Convert if you know we do have some home builders clients that Altos so they so, you know, maybe they'll meet you along the way. Yeah, absolutely.

Kevin Oakley  55:04 Also, I've worked really hard at this you can just Google Kevin Oakley and all up here as the number one search result make it make it really easy for you. People are always surprised by the way. Companies very busy I'm very busy but homebuilding is my my hobby, my job, my entertainment, my everything. And so it always surprises people when they shoot me a message or they'll find my phone number and text me and they're like, you're gonna reply to me at seven o'clock. And by the way, my business partners like don't do that. Don't invite that but it's really other than Ohio State football and pancakes. The only things that I think about and so happy to talk about about it with anyone at anytime.

Mike Simonsen  55:46  

That's great. And Twitter. Great follow on Twitter, Kevin Oakley on Twitter as well. So okay, Kevin Oakley, Talking new home construction and a lot of the macro trends really, really need conversation. I really appreciate having you on the Top of Mind podcast, everybody. This has been the Top of Mind Podcast. I'm Mike Simonsen from Altos Research, you can find the podcast on our YouTube channel, which you can if you don't already, subscribe to that, subscribe to that. And if you are thinking about the data, you can get Newcom you can you can connect with Kevin for CA watching what's happening in new construction or Altos Research, when you really need to turn that data into reaching your customers who are wildly afraid right now what is happening and they really need the data. So visit Connect with us. And we will see you all again in a week or so on the podcast. Thanks, everybody. Thanks, Kevin. Thank you.

Outro  56:49  

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