00:00I'm here at the J.P. Morgan Leverage Finance Conference in Miami Beach and I am with someone who is
00:06really close to a lot of the domestic issues that we've been dealing with as we look beyond for a
00:11moment some of the geopolitics.
00:13Thomas Louis he is chief financial officer of Brookfield Residential. Thomas thank you so much for being with us. I
00:19want to start with the idea and understanding what's going on geopolitically.
00:23There has been a flight to Havens. We have seen benchmark yields go down significantly. Mortgage rates are below 6
00:30% for the first time since 2022. How much could that potentially reignite interest in the area?
00:36Thank you for having me Lisa and I'm really glad to be here today. And I think what we're seeing
00:40here in the early stages of our spring selling season is there's a lot of good interest in demand and
00:45traffic that's coming to many of our housing and land communities across the nation.
00:49And I think what that momentum is a little bit tempered because of just general uncertainty around the market whether
00:56it's just around the economy around inflation interest rates job growth unemployment just the uncertainty of that nature combined with
01:05affordability as you have talked about there with elevated home prices just due to the systemic shortage of residential lots
01:12and not meeting the demand there.
01:14And elevated rates that we've seen over the past couple of years. That's really kind of tempered the buyer from
01:20converting into buying a house and how we've been able to address that with the elevated rates is operationally introduce
01:27incentives like rate buy downs to lower that home ownership costs.
01:31And that's really the ultimate goal is trying to get that stability in the market.
01:35You know people talk about inventory shortage. You have seen an inventory build up in the Sunbelt in particular. And
01:42now we're hearing about homes that are taking a little bit longer to sell.
01:46Are there certain regions that do seem like they still are facing a housing shortage and others that have a
01:52little bit more of a glut at this point.
01:53Yeah I think that's just the short term nature of you know housing starts in certain markets where there has
02:00been a build up of spec inventory to try and meet the demand there.
02:04I think it's more of like the uncertainty in the economy that's converting the home buyers as they're still coming
02:09out and they're still looking at the communities on a daily or weekly basis.
02:14I think it's really in the long term that's a systemic supply demand imbalance there where there's been a lot
02:21of unproduction to meet that hasn't met that full housing dynamic and household formation.
02:27One thing that you said was that mortgage rates have been a real obstacle for people and adds to the
02:33affordability issue.
02:34Do you have a target in mind for how low mortgage rates would have to go where that takes that
02:39aspect of the equation off the table?
02:42Yeah no I think it's where we're kind of approaching that area where you know the rate buy downs I've
02:46been looking at is kind of trying to target that number that we're slowly approaching here that below six.
02:53You know ideally it's a little bit lower I think it's the dynamic of right now just with the uncertainty
02:58in the market where does that opportunity stabilize the volatilities eliminated to allow that consumer to be confident to buy
03:05their home.
03:06Right now it seems like housing is the political issue.
03:10Does that make you nervous?
03:12Well you know I think we could deal with just the what we know today and you know in the
03:18short term it's the policies that allow us to kind of build that consumer confidence that we've talked about in
03:24terms of the macroeconomic environment.
03:25In the long term it's the opportunity here to kind of find those opportunities and policies working with state local
03:33counties to kind of improve entitlement efforts to help with that supply constraint and address those issues there.
03:39One thing that has come into the fore has been this idea of banning institutional investors from buying into the
03:48housing rental market in particular.
03:50Does that affect Brookfield residential at all?
03:52No I think we see this as a real good opportunity for us to bring in institutional investors whether it's
03:58looking at our land business where we've been able to bring in variety of capital from institutions like insurance companies
04:06to look at short and medium term lot development opportunities.
04:09Where you know we've been able to reduce the risk of entitlement and also have kind of scheduled takedowns with
04:16builders is a real attractive opportunity for institutional investors and also attracting kind of like minded long term focus investors
04:24for master plan communities to kind of work through.
04:27And the opportunity to bring lots and address the shortage is really attractive returns that it brings and you know
04:34coming to conferences like today scaling back on the growth of our land business we can build additional homes and
04:40grow our housing operations where high yield bonds you know and the long term focus of institutional capital like that
04:48is going to be important for us.
04:49Are there regions that people are more interested to build in than others?
04:53You know I think it's a lot of great dynamic markets there.
04:56It's where markets and regions that are the greater supply shortage and gaps is what we're seeing is kind of
05:02the greater opportunities like the Sunbelt that we've talked about here continues to be that.
05:06How difficult is it in the sort of hodgepodge of different regulatory regimes right.
05:11I mean there are different proposals that are on the table and it seems like politicians are trying to take
05:15a more aggressive stance in terms of what the requirements are to build.
05:18In terms are of what the requirements are of what you can sell things for I mean how much does
05:23that pose a risk for you as an investor of these properties.
05:28Well I think it just goes back to the root of that there's a systemic short supply constraint.
05:33You know where household formations are exceeding the production of finished lots and how home housing starts and I think
05:39finding those policy initiatives which will largely starts at the local level and state level to bring those opportunities whether
05:48it's you know improving cycle times improving entitlement visibility reducing approvals and kind of coordination of infrastructure is going to
05:57be helpful in addressing this constraint in the long term.
06:01One thing that a lot of people have noted is that the average age of a homebuyer has gone up
06:06dramatically and typically people are not really able to access the homeownership market if they're raising kids starting a career
06:15have college debt.
06:17That's even more so now to the point where some people don't even want to participate.
06:21How much do you see that dynamic playing out in terms of the types of houses that you're building and
06:26who you're building for.
06:27That's a very good question.
06:28I think it's a wide variety right now that we're seeing you know in terms of kind of the product
06:33and the designs and the design plans that we have are really addressing a affordability you know the cost per
06:41square footage and just the size of the homes just to make it to a true affordable level to you
06:47know households that might host multi generations in there.
06:51I think I think it's it really depends on just kind of where the natural state of the buyer is
06:54today but it kind of still forces more that entry level and move up opportunities.
06:59How worried are you that if we do get some sort of significant decline in mortgage rates that you end
07:06up with the market flooded with inventory on the secondary market with all of these people who have been locked
07:12into their homes because they didn't want to give up a 3.25 percent mortgage given the fact that what
07:17they could buy is nothing close to that.
07:18But we're looking to downsize.
07:19We've been looking to move.
07:20We're looking to upgrade.
07:21You know I think that's something that we constantly monitors the resale market and just the inventory levels there obviously
07:27with mortgage rates being elevated and some of the products incentives you've been able to bring down has attracted the
07:34market to the new home.
07:35I think it's still that pent up demand that has been built up for over a decade is still going
07:41to just be a strong market for both the new home and resale.
07:43You know I'm struck by the distance because the conversations that I've been having at this conference have all been
07:48talking about longer term about optimism about the resilience of the U.S. economy and it doesn't seem like people
07:55are paying that much attention to geopolitics to potential shutters in the private credit market.
08:00It seems like people are saying we're keeping an eye on that but ultimately we're focused on a certain resilience
08:06in the underlying economy.
08:07Does that square with what you're seeing right now.
08:09That's exactly kind of what you're saying here is that the economy here is quite resilient and continues to be.
08:15And I think it's more working through the volatility and that stabilization of it is what's going to build the
08:20consumer confidence.
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