00:00Katie, good to have you on the program. I want to remind everybody where you play
00:04when it comes to these home builders and when it comes to land. You basically have the land and you
00:10hold on to it for home builders for when they want to buy it and then build those homes. So
00:15you have a great read on what they're thinking. What are they telling you right now? What are
00:19you hearing from them? Yeah, well, as you saw, new home sales came out lower than expected at
00:24580,000 down 7%. But what we're actually seeing is that builders are more bullish than those
00:31headlines are suggesting. Our builder clients, where we're financing land to keep it off balance
00:36sheet, are aggressively buying finished lots today. So they're buying land but not building?
00:43Well, so they're buying the land that's ready to build. That suggests that they're more bullish
00:48than what you're seeing there. What is happening is that they're being more disciplined. They're
00:53starting less homes and they're going more towards build to order and wanting to build less spec
00:58homes, which is why you're seeing starts down as well. But they're definitely bullish. And you see
01:03that with how they're buying finished lots. We're closing on a deal a week. Katie, that sounds a little
01:09K-shaped to me with the idea that if they're not building spec but they're building to order,
01:14it seems a little higher end. And they're certainly across the spectrum. Home builders play in
01:19different areas. Is it fair to say that the higher end home builders are the ones who are more active
01:24right now? That's a great point, Tim. So that's exactly what we're seeing. So the higher end new
01:31homes coming in at $950,000 are doing extremely well. People are paying cash and they also have strong
01:37personal balance sheets. On the other side, affordability is really plaguing the entry-level
01:43buyers. And it's very regionalized. The people in coastal cities where you have high land prices,
01:50high regulation, it's harder to build. Those entry-level homes are just pricing people out.
01:55And so they're going into more affordable markets. So basically they're building for a sure thing.
02:02Yes. So the builders that have been able to, like Lenar, like D.R. Horton, you see them,
02:06they're adjusting, they're building smaller homes, they're offering financing incentives.
02:10They're doing very well because they're delivering that affordability in markets where
02:15people can still afford that monthly payment. But there are 268 cities in the U.S. where the
02:21entry-level house is now a million dollars. Most of those are in California and New York,
02:26and that's just pricing people out. Not that people don't want to live there,
02:29they just can't afford it. Great if you own it, but great if you don't. I mean,
02:32not so great if you don't. Hey, one of the things I want to ask you, Katie,
02:35is President Trump canceling plans to sign that bipartisan bill aimed at lowering housing costs
02:40and increasing supply, basically looking to make housing more affordable. This has to do with
02:45politics. But having said that, remind us about your view on this and the impact it may have on
02:51the housing market from your vantage point. And I say that having been at Milken in May and doing
02:56a real estate panel with home builders and those in the industry, maybe not so keen on this and having
03:02limitations for investors to be involved. What's your view and how this might impact the housing market?
03:10Yeah, I mean, it's definitely good to see both sides of the aisle address the supply issue. We really
03:17are undersupplied, but at the federal level, it's hard to really make a big impact on supply. It's really
03:22more at the local level where you can affect supply through improved permitting, faster zoning and
03:28deregulation. So that's, you know, it's still up in the air of how it's going to land. But institutional
03:36investors right now own less than 1% of homes at the peak. In 2022, they own 3% of
03:41homes. So what
03:43we're waiting for is there's a lot of build to rent developers that are on the sidelines waiting to see
03:47how this shakes out to get back in and unlock some capital, which will help the supply problem as well.
03:52Is anything on the local level that you mentioned, the permitting or anything, at least when it comes
03:58to the way people feel about zoning on the local level, is that happening in any part of the country
04:03right now? Well, I mean, especially on this bill, it could help with environmental deregulation.
04:09There's also some provisions currently in it that would help with smaller banks improve their lending
04:15capabilities, also deregulating manufactured housing. So at the local level, we really need federal funding
04:22to incentivize local governments to speed up zoning. Because if you spend three to five years trying
04:28to get land zoned for the approvals, that alone adds thousands of dollars per house. That's a more
04:35significant impact to housing affordability than a 50 basis point rate cut is going to be.
04:39So bottom line with the president's trying to sign this bill, that's not really necessarily going to
04:45make housing lower. I mean, we are always reminded it's, you know, location, location, location. It's all
04:51specific on a state, a city. I mean, between zoning and so on and so forth. That's really what comes
04:56down to it in terms of supply and pricing, whatever the economy bears, right? That's right. I mean,
05:03anything that we can do to make mortgages more available and improve affordability helps,
05:10but that's not really going to fix the supply issue at the national level. Like you said, Carol,
05:14it's local. I mean, I feel like we have this conversation whenever we're talking, like you can do
05:20whatever you want at the federal level, but unless those laws, regulations, environmental rules,
05:26zoning, and you get people to say, we are okay. And by people, I mean voters, we are okay
05:31with increasing density in certain parts. You're not going to move forward with fixing the problem
05:37in this country. Exactly. And that's why you continue to see the South Texas, Florida, the Carolinas
05:43continue to dominate in new homes because they have less regulation. They still have, you know,
05:48affordable markets where it's the cities and the locations that have great land parcels,
05:54but just too much regulation to make it worth the builder's time. It adds years of cost and it's
05:59just too expensive. Katie, in a lot of parts of California, they seem to be making a dent with
06:03this idea of the ADUs, the accessory dwelling units, and taking a lot and adding a two or three
06:09bedroom home. In some cases, you can add a pretty big home depending on the lot size.
06:13Is that actually making a dent?
06:16We are starting to see some additional developers who were not able to make deals pencil before.
06:22Now they're coming back to the table and saying, okay, if I can improve density myself through ADUs,
06:29it definitely could help.
06:32That's wild. Like you see stuff on social about that too. And it's just amazing. Like the home's
06:37being put everywhere and anywhere. I am curious, Katie, from the clients that you guys talk to,
06:43the home builders, what is top of mind for them? Is it the rate environment? Is it policy,
06:49legislation? Is it labor costs? Is it material costs? What is it also?
06:54Yeah. I mean, at the local level, definitely, if we could get some type of incentives for local
07:00municipalities to either approve or deny zoning in 90 or 120 days without dragging it out, that would
07:07help certainly. So shortening that time, which reduces costs and reduces their carrying costs on
07:12their land assets. They're also really continuing to adjust the type of homes, building smaller homes
07:18and building what product people are looking for. It's not that people are going and looking and
07:24shopping for incentives. They're really shopping for an improved quality of life and a payment that
07:29they can afford. And so builders that are delivering that and buying down the mortgage rates are still
07:34doing well, as evidenced by Lenar recently is still building and delivering 20,000 homes a quarter,
07:40which is just, it's incredible, but they're doing it on purpose, eating into their margins to deliver that
07:46volume.
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