Industry News: Multifamily Pullback, Builders Cut Prices, and What's Next for Rates? - TLP172

Ryan and Charles break down the latest U.S. Census housing report, falling builder confidence, and what Kevin Warsh's first Federal Reserve meeting signals for interest rates and the housing market moving forward.

All links to the articles discussed during this episode can be found on the show notes page:

https://landdevpodcast.com/podcast/industry-news-multifamily-pullback-builders-cut-prices-whats-next-for-rates-tlp172

Want even more insightful land development content? Join our free community over at landdevpodcast.com.

Inside you'll find masterclass videos with developers, curated industry news, and a growing library of land development insights.

Create a free account  at https://landdevpodcast.com

Find us on Apple Podcasts: https://podcasts.apple.com/us/podcast/the-land-development-podcast-with-ryan-glick/id1719809664 

Find us on Spotify: https://open.spotify.com/show/3W6laqY7Ou16r0RpjJlYB4 

Find us on YouTube: https://www.youtube.com/@TheLandDevelopmentPodcast 

Check out our full library of interviews: https://landdevpodcast.com/

Transcript

SPEAKER_01 0:00

A lot of these markets are still great to build in. You drive into Dallas, you drive into Miami, you drive into Charlotte, you're gonna see high-rise towers going up. This is still happening. Still happening, but not quite at the scale. You look at a city like Austin that had some pretty significant issues with high-rise multifamily. It's not happening at the same rate that it was. But deals are still getting done, and there are still ways to make it work.

SPEAKER_02 0:37

Hey, what's going on, everybody? Welcome back to the Land Development Podcast. I am your host, Ryan Glick. We have an industry news episode for you today. And joining me as always is Charles Covey. What's going on, Charles? Hey. Well, I have to say a public thank you to you because uh, you know, I spent the last week out west doing some uh national park sightseeing with my family and hiking and everything. And, you know, our first stop was Zion, and you you helped me out, kind of set me straight on which uh trails to hit up and everything out there. And man, we had a really good time getting away and going out there, and it wasn't very busy out there either, um, which was kind of crazy, and but it was also nice that we just didn't have that many people around.

SPEAKER_01 1:22

Oh, that's great. That that park can get really, really packed, but it's stunning, absolutely beautiful.

SPEAKER_02 1:27

Yeah, and I should probably rephrase that. Zion was pretty busy. The other parks were not so busy. We did uh Bryce Canyon and Grand Canyon and a bunch of other miscellaneous parks that we, you know, came upon as we were driving from park to park. And yeah, Zion was definitely the busiest out of all of them. But back at it today, uh this week, and you know, getting into some of the topics when I was going back through, I kind of disconnect quite a bit when I am away. So it's getting back into the swing of things and seeing what's going on. And um, today we've got three articles we're gonna get into. First one is the May U.S. Census housing data was released, and so we're gonna dig into those numbers. Uh, then we're gonna look at the National Association of Home Builders builder confidence scores and uh the fact that they are now on their longest streak below 40 since 2011 and 2012. So I'm not headed in a great direction there. And then lastly, we're gonna dig into interest rates. And I really want to dig into what's gonna happen between Trump and Warsh if Warsh ends up raising rates. So that's something we're gonna dig into uh at the end here. So with that said, let's go ahead and get into our first article, which comes to us, as I said, from the U.S. Census Bureau. Headline reads May housing starts dropped 15% on a multifamily collapse, but single family holds roughly flat. Total privately owned starts came in at 1.177 million on a seasonally adjusted annual rate. That is down 15.4% from April and down 8.7% from a year ago. Single family starts only fell 1.9% month over month to 882,000. The big crash is multifamily. Building permits actually held up, total permits down only 0.7% from April, single family authorizations were up 0.7%. Regionally, the south and the west are getting hit. May starts were down 26.8% in the northeast, 17.2% in the west, and 17% in the south. The Midwest was the only region that went up by 3.7%. Um, anything surprising here, Charles? I feel like this is consistent on what we talked about uh on our last, I think two episodes ago when we got into some of the April numbers.

SPEAKER_01 3:48

Yeah, it looks like this is what we expected. So we had this big boom over the last number of years. We've got a huge amount of multifamily deliveries. So inevitably, new starts are going down because lenders are looking at the rates and at the uh the rent rates, and they're saying, hey, you know, rents are falling. They're not, this is not something that we want to lend on right now. So getting getting debts harder. Uh and in the markets where they're stable, they're certainly not uh not increasing at the rate that they were. So I think generally harder to make those deals work. You couple that element with the higher debt cost, and now you're gonna try to build this whole uh this whole project and maybe make a million bucks, like that's not even worth the risk. So I think that the deals are just too skinny at the moment, and that's a big element. There are some deals at work. Workforce housing still has some upside, uh, but I think overall, most of the deals are skinnier on average.

SPEAKER_02 4:40

Do you think the language uh around multifamily is overstated right now? I mean, there's a lot of like hard-hitting language around crash and all of this. Do you think that's uh a little over the top?

SPEAKER_01 4:51

Certainly. Certainly it's over the top a little bit. If you were in, I think it's gonna be this is gonna be sector by sector, city by city. If you're a if you're a major multifamily developer, you're finding ways to get deals done, right? You're your business not a charity, you have to find ways. And a lot of those ways are going to be either a government subsidized scenario or a workforce housing scenario, those seem to still be uh be okay. And there are certain instances where if you can get in at the right land basis in a market that's very strong, a typical market rate class A multifamily could still work, but certainly not at the rate that we saw a number of years ago, where everybody was buying, everybody was buying multifamily dirt, everybody was building one, and everybody thought they were going to make money. As it turns out, everybody didn't make money. Uh there were a there was a big gap between the haves and have nots, and that has trickled down into those that would typically invest in this sector because a lot of them got burned, and the deals are skinnier, so it's like, hey, if this is higher risk, me and all my buddies got burned, if this is the investor's perspective, and there's not that much meat on the bone anymore, then wait a minute, what are we doing? Let's go park our money somewhere else and do something different. So from an investor's perspective, it's challenging. And then from the developer's perspective, if the deals are so skinny, like, what do you what are you gonna do? So I think it is a it is a tough time in multifamily. There are some some deals still getting done, but it's definitely a smaller percentage, half or less compared to what we might have seen a few years ago.

SPEAKER_02 6:20

Yeah, and I I know that this data tends to be a little challenging to read into sometimes as well because we don't get very granular with it. I mean, we're talking in terms of regions and not metros and cities. Um, but but one of the one of the things here that we talked about briefly before we pressed record was just around the the different regions, but then also looking at Midwest and Midwest being you know the only region that actually went up. What do you read into that?

SPEAKER_01 6:46

Well, the Midwest didn't go up that much, and it didn't go down that much over the last couple of years. It's been pretty stable. Whereas some of the other markets, the markets went way, way up. Now they're trending down a bit. They're still up overall. A lot of these markets are still great to build in. You you drive into Dallas, you drive into Miami, you drive into you know Charlotte, you're gonna see high-rise towers going up. This isn't this is still happening. Still happening, but not quite at the scale. You look at a city like Austin that had some pretty significant issues with with high-rise multifamily, it's not happening at the same same rate that it was. But deals are still getting done and there are still ways to make it work. But again, that's that's market specific. There's not too many new starts in Austin, for example. But if you go to some of the other cities, Dallas is still building, you know, the the the big boys that build tens of thousands of units a year. They they didn't fire everyone. They're still in business, they're still building projects, they're finding a way.

SPEAKER_02 7:42

All right, well, let's go ahead and move on to the next segment, which is from the comments. Uh, we've got a fun one for all of you today. Uh this one comes from Instagram from Bucky1194. Comment reads, you land developers suck taking away farmland by the fistful just to pad your pockets. Shame.

SPEAKER_00 8:03

Oh, wow. He's got a uh very distinct opinion, doesn't he?

SPEAKER_02 8:08

Yeah, I I think it's interesting because we post, yeah, I've mentioned this before, but I know we have a lot of listeners, so I'll say it again. But we post clips from our episodes and everything across social media, across all different platforms. And so we get a lot of people supporting us, but we also get the other side who, you know, they are just anti-developers. And then when you I always respond to these people too, and I probably maybe shouldn't, but I do, and they never reply back because I ask them, I'm like, what should we use to develop if we don't use some farmland? But it's also the same people who are against higher density. So they don't want us to use farmland, but they also don't want higher density, which would use less farmland. They want bigger lots, they want, you know, these acreages and everything. And so it's just really bizarre and it's hard to have conversations with people that you know have, you know, have this kind of take.

SPEAKER_01 9:02

Well, you could apply that same logic to any industry. It's like, oh, these big, bad car builders are just using our natural resources, they're using steel and they're using paint and they're exploiting all these laborers, you know, and paying them these wages to build these cars or just to line their pockets. Or you could say it about the company that grows bananas. They're just using all of this fuel and all of this water and all of these resources to grow these bananas just to line their pockets, right? I mean, this is how society works. There are buyers, and when there are willing buyers and willing sellers, and those two have an exchange, then then things happen. That's how the free market works. So it's always fascinating to see this perspective.

SPEAKER_02 9:42

Yes, for sure. All right, let's go on to our second article, which comes to us from the National Association of Home Builders. Headline reads: Builder sentiment falls to 35 in June, now the longest stretch below 40 since the foreclosure crisis. The NAHB and Wells Fargo housing market index for June dropped on June 17th, and builder sentiment is now at 35. That is down two points from May, and this is the 14th month in a row that the index has been below 40. The last time we saw a streak this long below 40 was 2011 and 2012, which was during the foreclosure crisis. Looking at the regional three-month moving averages, Northeast is at 44, Midwest is 43, the South is at 33, the West is at 27, so the South and West are dragging the country down. Again, we've talked about some of that in our prior article, just about some of the differences between different regions of the country. Current sales conditions are at 38, six-month sales expectations are at 45, and traffic of prospective buyers is at 25, which is rough. 35% of builders cut prices in June, up from 32% in May. Average price cut is 6%, and 62% of builders are using sales incentives. That is the 15th straight month above 60%. So uh what are your thoughts on this, Charles?

SPEAKER_01 11:06

Well, I think that there are a lot of factors that contribute to this sentiment, and they're real. This is an actual challenge. Things are not as good as they were a couple years ago, but they're certainly better today than they were in 2008 and 2009. So perspective there is important. I think uh something you and I have discussed, it probably gets worse before it gets better. Now I think we can uh we can say with some certainty that rates will stay the same or go up this year. I think it's a much lower likelihood that rates will drop, which is very disappointing because I I think 12 months ago, six months ago, we really thought that there was a high likelihood of this happening. And I think that um that's gonna be a very contentious issue between Trump and Warsh on this, and we'll we'll get into that. But I think that it's gonna get a little bit worse. There's going to be some challenges in the home building space over the next six to twelve months, maybe eighteen months. But I think long term we're all in a very good position. Now we we certainly don't want to use other people's business decisions to define an industry and predict what it's gonna do. But there's a lot of very smart people that are betting a lot of money on the home building industry being very strong over the next decade. And I think they're right. Over the next six to eighteen months, though, I think it's gonna be challenging. Is it gonna be terrible? No. But it's not good. There's no there's no boom happening, there's no boom imminent in the next year and a half. So it's probably going to be status quo or a little bit less. I think with rates ticking up, I don't think that's going to have a catastrophic impact, but it's certainly not going to help things pick up. So that's the state of what it is. The next 18 months might be not as much fun, but there's still money to be made. The businesses are not good. I don't see these home builders going out of business. This is not a catastrophic situation, but certainly not a boom at the same time. So we're, and this is expected, we're in what we believe to be pretty much the bottom or close to the bottom of the draw-off of this particular real estate cycle. And we're seeing this across asset classes. And it's likely being close to the bottom, likely up from here.

SPEAKER_02 13:19

And I'm, you know, I'm continuing to have conversations on this podcast with people who are doing developments on the residential side and who are building, and they're continuing to move. I mean, they're they'll admit that things aren't as quick as they have been as far as you know, the sales cycle and everything, but they're they're still very bullish. I mean, housing is still needed and everything. So um, I definitely am hearing the same thing from others that you're saying as well.

SPEAKER_01 13:45

You you cannot discount the fact that we're dramatically underbuilt compared to demand. So that has to at some point work itself out or at least move toward working itself out. So we're we're going to continue to have that challenge. There's more people wanting houses than there are houses for them. It's a great problem if you're in this business. So that's why I say there's no scenario where the industry craters like we saw in in other downturns, but it's just not quite as much fun over the next 18 months.

SPEAKER_02 14:17

Yeah, and let's let's talk about, let's, I think that's a good segue into our last article, which is around rates. So article number three headline reads rate cut expectations fade as policymakers signal higher rates ahead. So from this article, Kevin Warsh ran his first uh federal chair meeting on June 17th as Federal Reserve Chair. The committee voted 12 to zero to hold the federal funds rate at 3.5 and 3.75%. That is the fourth meeting in a row at that level. The median dot plot now projects 3.8% by year end. That is up from 3.4% in March. Nine of 18 members project at least one rate hike this year. Six of those uh project two hikes. Trump went on it on CNBC in the days leading up to the meeting and said he would be disappointed if Warsh did not cut rates right away. He did not get those cuts, but notably his reaction afterwards was way softer than how he treated Powell. He called Warsh a very talented guy and said Warsh is going to do a good job. Mortgage rates were already at 6.52% the week before this meeting. Trump publicly demanded cuts from his own Fed pick. Warsh said no this time around. Iran Risk, uh, war risk is the official cover. Warsh and the committee cited elevated inflation, uncertainty tied to the Iran conflict as the reason for holding steady. So I I'm really interested in how this is gonna play out for many different reasons, but I think the we watched many different videos of Trump talking about his pick and the fact that he wouldn't have picked Warsh if they didn't have some sort of, you know, if he wasn't going to do some of the things that Trump wanted to see happen. I don't know, based on this, how this is gonna go down. If if Trump has a short leash with him, knowing, I mean, I understand that Trump is not necessarily, or I guess Warsh doesn't necessarily have to report to Trump and do what Trump says, but there had to have been some sort of agreement there, I feel like. What what do you think, Charles?

SPEAKER_01 16:25

Certainly. And I don't know if that agreement got had to get renegotiated or if there's maybe a violation of that agreement at the moment. I think that will that we'll see that play out, see how that goes. What may get really interesting, what I think what is the potentially the most interesting topic um in this whole space right now is the Fed redefining the CPI. And that is the the index that they use to define what inflation is doing. So imagine you you know you have a gauge on your uh you know, the dash of your truck and it's telling you what the temperature is. And this is a different gauge that is measuring the temperature in a different way using different metrics than that gauge that we're used to. And there's an adjustment to understanding that information. So there's a lot of pushback, but uh Warsh has been has been trying to get what would be called a trimmed mean inflation, which is a different methodology for measuring this. And if you do it that way, you measure it that way instead of the the CPI or the core PCE, um, then it might look better or it might look different. One might be more accurate than the other. I I'm not familiar enough with them. I'll I'll dig into that a little bit more. But what I do know is that he's pushing for a different methodology for evaluating inflation. Now, what some would say if we've had you know the last five years of you know stability or increase, and then now all of a sudden you change this, it would be an attempt to move the goalpost, so to speak, in an effort to justify a rate cut. Now, I'm all for that, so I'm not gonna argue, but I think a lot of people would definitely argue. So then how do they justify what might appear to be moving the goalposts? And that's gonna be a topic that I think you and I will follow very closely because a shift in in the valuation method is pretty notable because we haven't had that in a very long time. I think it's net I think it's needed. I don't like the CPI that much anyway. It's not terribly accurate, and it's pretty lagging. So the trimmed mean would give us a little more, potentially a little more accuracy or a better way to evaluate. So we'll follow this a little closer. But if Warsh got his way, they started using the different methodology to evaluate, and that allowed them to then drop rates because of this different evaluation method. That's quite the storyline, and I'm certain the media will have a heyday with this. So it could be really fascinating.

SPEAKER_02 18:59

Yeah, something else I was thinking about too. The last line on this slide here talking about the Iran war risk, you know, we've seen over the last week that or a couple weeks that, you know, Trump has come out and now there's talks again, and I know we've we've I feel like it's uh Groundhog Day because we've been through this before, but now there's talks again of negotiations to basically bring this all to an end. And if that happens, I assume that's going to influence this, because if the the primary factor right now being cited is the Iran war risk and inflation related to that, and that is going if that comes to an end, then maybe this completely flips on what could happen the remainder of this year. But I think right now, or at least when they made this decision, you know, they're not certain that anything um that it's going to come to an end. Do you think that could play into it, or how much do you think that's going to play into the overall decision?

SPEAKER_01 19:51

Yeah, I think it has to be a factor because of how much the energy prices have the ability to affect this and that trickle down and what that does to everything else that's in the index. My concern would be that if that truly is a factor, I think it certainly is a factor. If that factor is now reducing, when do we start to see that show up? Because again, these are these are lagging indicators. It's not like the war ends today and you see that change immediately because again, lagging information, lagging data into this reporting. So you might not even really see the true effects of that until the end of the year. Six months lag is pretty typical with these numbers. So that would be my concern is that even if this is the chief element that is driving inflation, when are we even going to see the result if there was a significant change like the ending of this war?

SPEAKER_02 20:45

Yeah, so we'll we'll keep an eye on it, see, see where this goes. But it's definitely something that is going a completely different direction from what we thought, you know, a year ago. When we were looking at this about a year ago, it was something where we were feeling like, hey, probably not going to get any more rate cuts in 2020, you know, uh five, but it looks like maybe we'll get some toward the end of 2026, and now things are just kind of flipping on their head a little bit.

SPEAKER_01 21:10

Yeah, yeah. We definitely expected Wars to do a rate cut immediately. And I think a lot of people expected that when he was originally tagged for this role, and that has certainly not been the case.

SPEAKER_02 21:22

Yeah. Well, that brings us to a close here. Any uh final thoughts before we wrap up?

SPEAKER_01 21:27

I'm I'm most interested in following the potential change in how the Fed is going to evaluate inflation. That's one that as an economist, I think is pretty groundbreaking. We haven't seen that in a long time. So I'm gonna follow that pretty closely. We'll have some more information on that in a future episode.

SPEAKER_02 21:44

Yeah, that I know that's something you've talked about a lot, you know, over the last couple of years as uh we've been going through these episodes, is about the CPI and something better that needs to replace it just because of uh the data that's being used has not been great historically. So yeah, that'll be interesting to see how that all plays out. All right. Well, let's go ahead and come to a close here. Thank you all so much for tuning in as always. If you're not already subscribed, please click that button. We'd love to have you back for the next one. Otherwise, we will see you all back here again tomorrow for our next interview.