Barron's Streetwise - Are Home Buyers Heading to the Suburbs?

Episode Date: June 12, 2020

Yale economist Robert Shiller and the CEOs of broker Redfin and homebuilder Taylor Morrison. Plus, Jack rants about gold. Learn more about your ad choices. Visit megaphone.fm/adchoices

With record levels of dry powder available for investment, find out what's in store for private markets in 2025 and beyond. Listen to Crafting Capital in partnership with UBS at partners.wsj.com slash UBS, Spotify and Apple Podcasts. So we're set up this summer for the mother of all bidding war seasons, at least in these outlying areas. There's nothing to sell, and there are so many people who want to buy. They're emboldened by the stock market and the low rates. Welcome to the Barron Streetwise podcast. I'm Jack Howe. The voice you just heard, that's Glenn Kelman. He's the CEO of Redfin, a real estate broker. We'll talk with Glenn in a moment about the outlook for home buying amid the COVID-19 pandemic and beyond. We'll also hear from the CEO of the fifth largest

U.S. home builder. And I'll rant a little bit about gold. Listening in, as always, is our audio producer, Meta Lutzoft. Hi, Meta. Hey, Jack. So we had this very simple plan. Let's do a podcast about finance, and we'll keep it light, kind of like my Streetwise column in Barron's Magazine. We have these lovely studios in the middle of Manhattan to record in. Yep, great microphones. And so we put a date on the calendar to start at the end of March, right? And then things got more complicated. Yeah, to say the least. And I've been stuck home in a suburb of new york city with a couple of kids and i could complain about what a hassle that's been

but you're in new york city which is basically the country's epicenter of this pandemic you've told me that you have a smallish apartment and now you have two people working from there is it driving you crazy yeah sometimes one of us will go to the hallway and sit on a lawn chair and work from there. I'm thinking about the lawn chair. And what's funny about it is that people always sit so low in them. So I'm picturing someone out there with like an umbrella drink and sunglasses. You nailed it. The value of the housing market in the U.S. The value of the housing market in the U.S. rivals that of the stock market for size. So I think a lot of people are interested right now in how the pandemic might change the shape of the real estate market.

Way back in 2007, I wrote a column for smartmoney.com. That's now part of MarketWatch, arguing that at that moment, I would do better financially by renting a home than buying one. And the response from readers was passionate, positive and negative. It was close to the peak of the price bubble for houses, and everyone was talking about how renters throw money down the drain. I wrote a few simple things. First, house prices increase at the rate of inflation over long time periods, not some rate of return that's unique to houses. I base that on data collected by the Yale economist Robert Shiller, but also on common sense. Houses aren't magical things.

They're ordinary things made of sticks and stones and labor. In the short term, houses can be subject to booms and busts. But over the long term, they should rise in price at the same rate as other ordinary things, at the rate of inflation. I also pointed out back in 2007 that the ratio of house prices to yearly rents looked exceptionally high compared with its historical average, again using data from Robert Shiller. You can think of the price-to-rent ratio for houses like the price-to-earnings ratio for stocks. When it reaches extreme levels,

it might mean that future returns will disappoint. So I wrote that I was happy to rent an apartment in New York City while putting my savings in stocks. Long story short, house prices fell by about a third after that. And in 2011, I wrote a column in the Wall Street Journal titled, Time to Buy That House. I did eventually buy a house. Price to rent ratios look just okay,

but I had kids and I needed the space. So I moved to a leafy suburb. I wondered where housing affordability stands now and what effect the pandemic might have. So I spoke recently with Robert Schiller at Yale, and he said that house prices looked elevated in some markets. There's a house price index called the Case-Shiller Index, and nationally, it's 16% above its peak from the housing bubble. That's not quite as worrisome as it sounds because inflation has raised prices by 26% since then, so houses have lagged behind inflation since the bubble, which is a good thing for affordability. Schiller also mentioned that he thinks house prices will do better in the suburbs than in the center cities in coming years. It's not only COVID-19,

which makes people want to avoid crowds, but it's also these protests that sometimes get violent, which makes downtown look unattractive. One effect of the pandemic is that it's forced some people to learn for the first time that they can work from home full-time. Some of them might actually want to work from home full-time. You can live far away from the city if you can stay in touch through Zoom. So that's a bigger transformation than we've seen in the past. It's an interesting theory. On one hand, urbanization has been one of the biggest economic trends worldwide over the past half century.

It's difficult to imagine that suddenly shifting into reverse. On the other hand, I've heard from a couple of friends who say they're done with the city. One just bought a house down the street from mine. Another says he's moving out of the city after his lease is up. Now, those are anecdotes, not data. And statistically, they come with hidden variables. Both of those friends just had babies. And that was a common reason for moving to the suburbs before the pandemic.

I wanted more data. And since house purchases can take a month and a half to close and longer to be reflected in indexes, I wanted to check with someone who has access to a faster read on housing trends. I called up Glenn Kelman. Hi, Glenn. Can you hear me? Hey. Thanks for making a few minutes to speak with me. No problem. Are we doing audio only?

Audio only, yeah. Did you, like, comb your hair for this? You couldn't tell, but yes. Glenn's the CEO of Redfin, which is trying to become the Amazon.com of real estate. It has an online marketplace that uses data analytics to recommend house listings to potential buyers. And it attracts listings from sellers by charging lower fees. And it attracts listings from sellers by charging lower fees. Redfin has been growing quickly, but it still makes up a tiny share of the real estate brokerage business, which is highly fragmented with a lot of regional players. One complication Redfin has faced during the pandemic is that its agents are employees with benefits, not independent contractors paid solely on commission, which means it was forced to lay off workers. Here's Glenn. Our fixed costs have been hard to bear in a very volatile time. So

demand was off 50 to 60 percent at one point. At the end of March, we laid off or furloughed about a thousand people in our organization and we only have two or three thousand. So it was very severe and then demand came roaring back. The good news is Redfin has brought back furloughed agents and started hiring again. That is the one challenge of the culture that we have. We want to take care of everyone. We want to be full partners and employees with one another. But it means that it's just really hard to adapt to the ups and downs. A contractor model where you just have endless capacity is better suited to these kinds of conditions. One bright spot for Redfin is that its online focus is a good fit for right now,

when many buyers are interested in virtual tours. When we list a house, we perform this three-dimensional scan. It's like a Google Street view where you can walk around, pan left, pan right, look up at the ceiling, go into the next room, say, wait a minute, I forgot there was something else I wanted to look at. It's the fireplace, you know, white or black, and see the whole house that way. And so it's given buyers and sellers a way to market the property or see the property, even if you're not going to be in the house. Glenn says tastes have changed during the pandemic, both in terms of house features and locations, and that, yes, he's seen increased interest in the suburbs and beyond. It used to be everyone wanted an open floor plan, but we now need a different room to zoom in.

One parent, the other parent, each kid. And you also just see a massive shift towards small towns and suburbs. So if you were to compare the traffic growth to listings in major cities where the population's a million and up to the traffic growth in cities 50,000 to 100,000, which are basically suburbs and small towns. The small towns have outpaced the cities 164 percent. Meanwhile, the supply of homes for sale is tight, and that's probably good news for anyone in the suburbs who's looking to sell soon. So we're set up this summer for the mother of all bidding war seasons, at least in these outlying areas. There's nothing to sell, and there are so

many people who want to buy. They're emboldened by the stock market and the low rates. I asked Glenn for any tips he has for sellers. People drive up to the house and already form an opinion, so the yard needs to look good when they walk in. You want neutral pink colors. And that's just an area where you can be very data driven and where a redfin agent can just guide you through what we've learned about what repairs make a difference and what don't the short version of that is the kitchen matters and then square footage if you spend a lot of time upgrading a house without adding to the square footage it almost never pays off unless it's the kitchen. I should note that Redfin

is a favorite stock of longtime T. Rowe Price fund manager Henry Ellenbogen, now at his own firm called Durable Capital. Henry's a member of the investment roundtable at Barron's Magazine. I asked Glenn how big Redfin can become. Keep in mind it's a $3 billion company today. big Redfin can become. Keep in mind, it's a $3 billion company today. Our goal is to build a $50 billion, $100 billion company. Brokerages never get to more than 10 or 20% share even within a market, with a few exceptions like Cleveland and Boston. But our hope is that we can create economies of scale, that as we build this business, we can invest more in the technology platform, we can make a real estate agent more efficient, and we can keep passing that value to the consumer. And that turns a flywheel that drives market share. So big wheel, keep on turning. I heard that in a song somewhere.

Meta, big wheel, keep on turning. That's Creedence Clearwater Revival, my favorite band. Is that one of those we can play or one we get sued for? We probably shouldn't play it. It's kind of risky. You got to teach me sometime how to tell the difference. Can we play a little bit of it? Nope. It's either you can play it or you can't play it at all. But if I sing it, you won't get sued. No. Well, maybe we will for another reason. Emotional cruelty? Exactly. Well, maybe we will for another reason. Emotional cruelty? Exactly.

I'd better skip the singing. I wanted to speak with a builder to get another perspective on housing. Well, it's my favorite subject, so happy to help. Good. That's Cheryl Palmer, CEO of Taylor Morrison, based in Scottsdale, Arizona. Basically, two big UK home builders merged in 2007 and called their North American division Taylor Morrison, then took it public in 2013. The company has made some acquisitions since then. Its latest deal for William Lyon Homes closed this year and made Taylor Morrison the fifth biggest U.S. home builder. Cheryl says they build in California, Arizona, Colorado, Texas, the Carolinas, Georgia, and Florida.

She described those as the smile states. Is that something a lot of people say, smile states? I had to give it a quick Google to see what it meant. Is the idea that when you draw a line across these states, they form a smile across the sunny states there? Is that what we're talking about? That's kind of the idea. And I smile really big ear to ear. So it kind of represents that. I live in New York. That's like the frumpy eyebrow over the smile. Well, I used to live in New York and it's still a really good place. Cheryl says there was a big decline in customer

interest early during the shutdown, but that has come roaring back. I'll be honest, by the end of April, I thought the sales success in our business and across the industry was stunning compared to what I would have expected in an environment where sales offices are closed by appointment only for most builders, and that was our environment. Taylor Morrison's May sales were actually up 17% from last year. How we can go from peak to trough back to peak again all in about 10-12 weeks is unlike anything I've seen. Why the big rebound in demand? Well, one thing we haven't talked about yet is mortgage rates, which are about as low as they've ever been, in part because the Federal Reserve has driven borrowing rates lower to offset the decline in the economy. We are at historical low interest rates. So if you're thinking about it, and it's something you're going to do because of, you know, you're going to have children or you need to downsize, your kids are getting at

school age, whatever the reason, if you're considering a change, why would you not want to do it at a time when you can get interest rates in a place we really haven't seen before? Cheryl also mentioned that she stands to benefit from a tight supply of previously owned homes going up for sale. The resale inventory is pretty low right now. I think that's one because consumers don't want people in their house and don't know if it's the right time to sell. I asked about a flight to the suburbs. Remember that Glenn from Redfin saw clear signs of one in traffic data for house listings. Cheryl has done surveys and says the top motivations for her customers to buy houses don't include a desire to leave the city. The number one reason is better technology.

And what it really means is, you know, what I have to do working from home has just changed and I can't retro my house. The number two reason is I need more rooms. I need two offices. I need at least an office that two of us can exist in. So those are the real reasons folks are moving. And as I get down on the list, moving to a more suburban location, I think is number six. One reason Taylor Morrison might be hearing less about buyers leaving cities is that it doesn't

have a big presence in the cities that have been hardest hit by the pandemic, like New York. Or maybe it's just too soon to say. I asked Cheryl about the long-term outlook for housing. As you might expect for a home builder, she has a positive view. One of the reasons she cited is interesting. Millennial buyers. I've heard a lot of flimsy opinions on TV about millennials. Are millennials spoiled babies? How they aren't as interested in starting families and buying homes as previous generations. So millionaire Tim Gurner has told millennials that if they would stop eating avocado toast, then they could afford a home. But it's looking more and more like millennials just delayed starting families,

perhaps as a perfectly rational response to coming of age during the Great Recession. Cheryl says millennials are doing just fine when it comes to buying homes. In fact, about a third of our buyers are millennials, and nearly 50% of those buyers are buying their second home already. So it's really interesting. So do I think that is a huge trend for our future? I do. When I look at the size of 80 million of these millennials and we haven't even seen the largest concentration of them come through, I absolutely do. listener question about gold. Yeah, we do. We have one from Ravi from Chicago, and he's quite bullish on the podcast. Really? And my prediction is that Streetwise is going to become one of the top podcasts in the coming years. That's my prediction. Ooh, top podcast. Did you hear that,

Joe Rogan, with your big fancy Spotify deal? We're coming for you. And that's Ravi saying it, not me. Meta, how can I help this listener with excellent taste? So Ravi says he listened to last week's episode about the Fed and how the Fed can create money with a keystroke. And he asks where that leaves gold. Because I mean, no one can create gold by a keystroke. So do you think that the value of gold will increase over a period of time? What do you think about the gold and also its place in someone's portfolio? Excellent question, Ravi from Chicago. Thank you. When I think of gold, I think of this Rudolph the Red-Nosed Reindeer Christmas special that was made in the 1960s and it runs every year on TV.

Christmas special that was made in the 1960s and it runs every year on TV. One of the characters is a prospector called Yukon Cornelius. Sometimes he gets excited and he throws his pickaxe up in the air and he shouts for joy. And then after it lands, he picks it up, gives it a sniff and a taste, and he says nothing. I think that's pretty close to summarizing what gold can do for an investor's portfolio. Ravi, if you want to know if you should buy some gold, my answer is, only if it makes you happy. Here's why. Gold doesn't produce cash flows that rise or fall over time. It doesn't sit up nights thinking about ways to make itself more valuable. It just sits there.

Gold has been used as a store of value for thousands of years, but that has mostly to do with some lucky chemical properties. It's a metal that doesn't corrode. It's just the right degree of rare. There's a vast supply of coins, bars, and jewelry, but that supply isn't going to suddenly double. Gold is highly malleable, which is perfect for the job of stamping a king's face on a coin back before there were modern machines available. Gold has industrial uses, it's used in some electronics for example, but a little goes a long way, which leaves plenty left over for collectors. You might have heard that gold is a good hedge against inflation. I'm not convinced of that.

There's a 2016 research paper on this subject written by a Duke University economist named Campbell Harvey and a retired money manager named Claude Erb. And they look at gold prices starting in 1975, which was when futures trading started. They find that gold is generally kept up with inflation only over the very longest time periods. But there have been stretches lasting many years when the gold price has either sharply underperformed or outperformed inflation. That's what you want in a speculative trading instrument, but not in an inflation hedge. You might have heard that gold has a low correlation with other assets, that it doesn't

move in lockstep with stocks or bonds. But that's only true sometimes, and you don't know when in advance. Besides, a low correlation without some other attractive financial quality like a yield isn't much of a selling point. Setting cash on fire has a low correlation with the S&P 500, but I wouldn't recommend that you do it. Gold is sometimes called a safe haven, but over just the past year it has sold for less than $1,350 an ounce and more than $1,750 an ounce.

That's a pretty wide difference. That's fine for speculation, but it's not an especially stable value. Back in March, when stocks were tumbling, there was a stretch of seven trading days where gold fell 12%. I can't tell you where it's headed from here because, again, there are no cash flows to use to tell whether gold is fundamentally expensive or cheap. Sometimes people say gold would provide good protection in the event the world financial system collapses and currency becomes worthless and humanity descends into some sort of Mad Max style anarchy. Now, I'm not a doomsday guy, but my question for people who believe that is, really? Gold?

Because I'm picturing myself walking up to a marauding horde and saying, hey guys, if I could just have your attention over here, I'm running a little low on food, but I have this gold. It's super heavy to carry around and you can't really eat it, but how about we decide to begin accepting it as a means of exchange? I'll give you a little bit of my gold for some of that canned spam I see you have there in the back of the old marauding truck. What do you say? I'm just not sure gold is what I'll want most in that situation. Warren Buffett was once asked about a currency collapse, and he said the thing you'd really like to have in that situation is talent. Because if you're the best dentist in town, for example,

the resources of your town will flow toward you. Stock investing is a way to buy exposure to the talent of people who run great companies. Where does that leave, Robbie? I said a moment ago that bond yields are pitifully low now, and stocks have had an amazing bounce back this year. My guess is that means the opportunity costs of buying gold now, in other words, the return you could get by buying something else instead is fairly low. And if gold makes you feel safe, then you're getting some utility out of it. It's making you happy. Just don't overdo it. Remember that a broad stock index already has a smidgen of gold exposure if it owns

gold mining stocks. You're going to hear a lot of passionate views and misinformation about gold, partly because there's a big industry of people who sell the stuff at a steep markup, and partly because investors are prone to physics envy. It makes them want to state unknowable things as absolute truths, like they're talking about gravity and not speculative behavior. Yukon Cornelius can tell you what most of that analysis is worth. Nothing. behavior. Yukon Cornelius can tell you what most of that analysis is worth. Thank you Ravi from Chicago for sending in your question, and everyone, please keep the questions

coming. Just tape on your phone, use the voice memo app, send in an email to jack.how, that's h-o-u-g-h, at barons.com. Send comments too. I know some of you out there disagree with me on gold. Let's hear it. We might play it. Thank you for listening. Metalootsoft is our producer. Subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen to podcasts. If you listen on Apple, write us a review. Follow me on Twitter to find out about stories and new podcast episodes. That's at Jack Howe, H-O-U-G-H. See you next week.