We're probably not headed for a repeat of 2008 in the housing market, but it sure is weird out there. In this podcast, Motley Fool contributors Matt Frankel and Marc Rapport talk with Brandon Snow, executive director, at Ally Financial, and Jon Ziglar, CEO of Redfin's RentPath.
Topics include:
- The numbers behind rent increases.
- The rise of build-to-rent housing.
- How the rental landscape has shifted.
- Why more home contracts are falling through.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on August 14, 2022.
Jon Ziglar: Owning a home is still very much the American dream for many people, but in a lot of cases, it is no longer that. People actually prefer the flexibility, but they still want to live in a single-family home, and so rental of single-family homes is a huge growth driver in the industry. There's a huge demand for that and a demand for a consistent product, and so I think that they're filling that need.
Dylan Lewis: I'm Dylan Lewis, and that's Jon Ziglar, CEO of Rent. A rental search platform that was acquired by Redfin for $600 million back in 2021. On today's show, we've got two views of the residential real estate landscape, will start with [Motley Fool contributor] Matt Frankel's conversation with Ziegler, where they discussed where rents are cooling off, and the areas that are staying hot. Why this industry is begging to be disrupted in the future of build-to-rent housing?
Matt Frankel: RentPath to read now, recently became a part of Redfin. Redfin acquired you I think, earlier this year if I'm not mistaken. How does rent fit into Redfin's ecosystem? In other words, what's changed since the deal is closed other than your name?
Jon Ziglar: Redfin acquired the business in April of 2021, so just a little over a year ago. The thesis behind it really is that Redfin, if you're familiar with it is in our opinion, the best certainly consumer experience brokerage site in the market. What they want to be able to do is give people looking for a home, you'd be able to be relevant in that, in every part of the journey. They already had one of the most visited brokerage websites on the web with over 50 million unique visitors a month. They have a title business, they have a mortgage business, so really call it a one-stop shop of all want to find, get a broker. They have lever 6,000 brokers around the US that can actually help me find and purchase my home. I can do that title, I can do the mortgage.
But there's a huge segment of people that are either going to be renting and want to buy, or rental is how they want to actually go forward. What Redfin want to do is be able to hit all of those consumers. About 20 percent of people go into Redfin, actually ultimately end up renting. Weather is because they can't afford to buy a new home, or they ultimately choose not to. This really fits in within that ecosystem. Now we operate very separately as well because we have a pure rental side are we actually have a number of rental focus sites that just two rentals, but we also now power rentals on Redfin. If you go to the Redfin web or app, you can look for homes to purchase, but you also can look for homes and apartments to rent.
Matt Frankel: Another way of saying it is that, by just focusing on homebuyers, Redfin was shutting out like 50 percent of the market, not exactly half-and-half, but it's somewhere in that ballpark. It brings them into the ecosystem, and it creates more optionality on the platform and I guess you would say.
Jon Ziglar: Would does it also enables them to build a relationship with people that are renting now, but maybe in five years and I want to purchase? Now I've built that relationship. I know more about them, and I can put not just the right rental property funding them when they want to rent, but the right home in front of them when they're ready to buy and even look at their options between both.
Matt Frankel: I wanted get into just general rental market and the housing market and stuff like that. But before we do, where do you see Rent going from here? Because obviously the past year or so it's been very excited for Rent. What is your long-term vision for the company? Where do you see this going in five, 10 years?
Jon Ziglar: Along with this quarter relaunch of the business, we really see ourselves building more software and solutions, to as I say eliminate friction and increase efficiency and convenience along the rental journey. That's both for the consumer for the rental, as well as for the property manager. If you think about a rental transaction and even living, there are two parties involved at every point. Someone's looking to rent and ultimately becomes a renter and then there's a property manager landowner that is trying to fill the space and then manage that person and make sure that their experience is great, that they can have them stay longer, and manage that experience for them. We're really focused on is continuing to build out our software solution, through that rental life cycle. That the rent platform is the one that property manages, or go into go-to to manage their business, to attract and find a managed renters, and that renters similarly look at the rent platform and that rent brand as saying, "Well I know that that's going to be an easy experience. I'm going to find the right place. It's going to be easy for me to apply. I'll be screened and I can get in," and that's it. That's a platform that they're using, the rent platform. That's a place that I'm going to be easier for me to go.
Matt Frankel: There are few industries in the world more in need of disruption than real estate, which is why Redfin and Rent both exist. I'm a rental property owner, and literally every part of buying, finding a property manager, finding tenants, managing, maintenance things like that. Literally, every part of the process is clunky at best. There's definitely a lot of room for disruption and I'm personally excited to see where you guys take it over the next 5-10 years which is why I asked that question.
Jon Ziglar: One thing I'll say is, there's a lot of technology adoption in the industry right now. A huge amount, as you've seen in every industry that goes at this stage. I think right now where we are in particularly the rental industry in terms of technology adoption, is there a ton of point solutions that have been coming up, and so people are getting dissolution, does this thing and this solution business in because I don't want to be on spreadsheets anymore. Where we're really focused on is now that we're in that adoption cycle, actually having a single purpose-built platform, that does it all versus having to stitch all of those technologies together. We think we've seen that analog and a lot of other industries, my previous company that's exactly what we did, and we see a similar opportunity here.
Matt Frankel: In real estate also one of the biggest markets in the world. In addition to being one of the most disruptible, speaking of being a big market it's getting bigger in terms of dollar value very quickly in the past year or two. In the rental market, just looking at your own recent report, in the average US market, rent on a two-bedroom apartment is up 26.8 percent year over year in the United States. Submarkets are growing even faster than that. Why has rent gone up so dramatically? I read that inflation is eight or nine percent in that ballpark, why is Rent rising so much faster than overall inflation?
Jon Ziglar: First of all the real Rent increases occurred in 2020 and 2021. That's when the vast majority of them happen, in which is a perfect storm. I had a increase in demand because suddenly not everybody wanted ever roommate. Because that's started. You had a lot of liquidity going into the market through stimulus checks. That's actually a very healthy consumer, and we had historically low-interest rates as well. At a very healthy consumer a lot of demand, and people wanted bigger places and one live alone. That really enabled rents to increase along with the demand, and go there. We actually have seen since January of 2022 rents overall across the US have only increased about 2-3 percent. Actually not even keeping up with inflation as inflation has come on.
The other thing I will mention that the story is great to talk about the markets like Austin and others where it's up 100 percent year-over-year, and the overall increases. But if you look behind the numbers, the vast majority of the increases in rents have also been, in call it the high-end and more expensive apartments, and single-family homes. If you look at the lower call it and more affordable apartments, it's actually only increased between five and eight percent in the last two years. Year-over-year. It's not as much as you think if you start to take out those really higher in places. But it is continuing to go up. There's no question.
Matt Frankel: You mentioned the perfect storm now that the perfect storm is starting to pass if you will, do you see rent prices coming down? Because historically speaking at both rentals, and just home prices, things rarely moved backwards. It's happened once in my lifetime where home prices have moved down. That was in the aftermath of the 2008, 2009 mortgage meltdown.
Do you think higher rent is here to stay or is it a temporary supply demand issue?
Jon Ziglar: We've actually seen rental prices over the past month, have actually come down about 0.3 or 0.4 percent nationwide. What I think we probably will see is that you will see rental prices on average in the upper tiers stabilize where they are, maybe continue to move up just along with inflation and I think in the lower tiers, which also have not moved up all that appreciably over the past year anyway. I think that's a place where we may actually begin to see pressure because you just don't have as healthy of a consumer and with the inflation where it is, gas prices where they are, that's the consumer that just cannot afford to absorb a price increase and increasingly may not be able to afford the existing rents where they are. It really remains to be seen, but we think that there may be some risk there. But one thing I think that will moderate this is that if you look at most of the inventory coming into the market, it's really in the higher-end. There have not been nearly as many incentives coming forward for apartment builders to be building lower-end properties and units. You are probably going to see a crunch in demand on that lower end where all your supplies come in higher-end.
Matt Frankel: It's been true in the new home market as well. The biggest supply gap is at the lower end and entry-level homes. When I was looking at your data where I quoted that figure rents up 26.8 percent on a two-bedroom. What really stood out to me is the wide range of rent increases and particularly the fact that rent has actually declined at a few metro areas across the country. That seems like a bigger gap between the highest performing and lowest performing markets than even the home prices. Why do you think we've seen such a disparity between different areas of the country?
Jon Ziglar: I think a lot of it has to do with you've got a new work from home environment or work from anywhere environment so people are able to actually move wherever they want to move. It seems people are really moving to two general areas. One is the Sunbelt, which is typically, with a number of exceptions, was much more affordable. So they can get more, they can live in a place that had lower crime, better quality of life. Then we've also seen the large cities that are always going to have a real draw for people like New York City. New York City is back above where it was when it went into that to the pandemic. What you see is people voting with their feet because they don't need to be in a certain place for their job and so some markets where they can leave and they can go elsewhere. You're really going to see a real difference based upon the livability of the city, affordability of the city, the resources around it because people working were living where they want to live versus where they have to work.
Matt Frankel: I know you can't really talk too much about home sales and home prices and things like that because obviously, you're the rental company, but home affordability has gone down and that has played into the rental market. It costs people a lot more to buy a home, both on price and on mortgage rates. The average mortgage payment on the same home, a year ago is up about 70 percent when you figure the higher cost of the house and the fact that mortgage rates have essentially doubled. It does play into the rental market a little bit because it's creating people who are priced out of the housing market. Where do you see the housing market going? Not just for the rest of 2022 but you can answer that from a more broad perspective. Obviously, you don't have a crystal ball, at least I don't see one on the shelf behind you. But take a crack at it, I guess.
Jon Ziglar: First of all, it's anyone's guess. I think there's some basic assumptions or thesis that we can go with now. We've already seen an increased number. I don't have the number off hand. I think it's 15 percent or 20 percent of homeless things we've actually put through a price decrease in the past month. We're already seeing asking prices coming down, we do see mortgage applications coming down as well. The demand has come off as well as sellers just starting to realize that they're not going to get a 120 percent of ask as they were before. Prices are already starting to moderate. As you pointed out, a lot of that has to do with two things.
We have huge amount of inflation, so people just not able to afford as much, just because everything else is costing more, and the same time correlated directly to it, mortgage rates are up significantly. I would say if it's just me betting with a crystal ball, that home prices, particularly in the middle and lower ends, are going to moderate and maven will probably be coming down. By the way, they had a historic increase over the course of the past year so whether that's saying the homes are cheap is a whole different conversation. But I do think you're going to see home prices coming down at the very least moderating, as they go.
Matt Frankel: It's probably fair to expect a lot of geographic diversions for that as well and depends what mortgage rates are going to do too. If mortgage rates went back to 3 percent overnight, not that that would happen, but if it did, then we would be having a different conversation.
Jon Ziglar: Well, the thing is that cycles go so much faster nowadays. By the time we think or we decide we're in a recession, we may be coming out of it. That's one of the things is, we probably are going to see it come down, the question is going to be for how long?
Matt Frankel: Speaking of the housing market, I mentioned earlier a little bit that there's a real supply gap at the lower end of the housing market. It's generally not that economical for builders to build starter homes, I guess you would say there's a big supply problem in housing. Housing starts are down. Since the financial crisis has been at a historically low level and it's created a lot more people who want to buy a house than actually own houses. Do you see a housing crisis in the making, in the US?
Jon Ziglar: We have a gap in housing overall. The primary reason being in 2008 when the Great Recession began, you saw housing starts and this multi-family and single-family dropped to historic lows. It didn't really recover to pre-recession levels until around about 2015. You've got a six-year gap there of just not building enough housing giving keep up. Then in 2020, 2021, we actually got back to where now the housing start to lease as of six months ago, were at levels we haven't seen since the mid-eighties. But you've got a lot of catch-up that we're going to need to have. I do think we're going to have a housing shortage just as we have an increase in population and increase in needs and we're just not keeping up with the demand.
Matt Frankel: It's going to take a while for that issue to work itself out. I think it's not an overnight fix.
Jon Ziglar: Absolutely. Then you have the current rates and the current economic instability. Whether the builders are going to be willing to extend themselves that much further with an uncertain future is another question. We may see housing starts, a multi-family and single-family begin to moderate as well, which will exasperate the problem two years down the road.
Matt Frankel: Speaking of housing starts, one of the biggest trends I've seen is this built-to-rent housing phenomenon in the market. I could just name one company I follow closely is the Howard Hughes Corporation.
Marc Rapport: There historically a land developer and they just announced their first ever built-to-rent housing community. I think it's 260 or just something like that. I can name a few other companies that have done the same thing. A lot of private equity is going into these build-to-rent housing communities. It's a big trend and it seems like there's still lot of cash on the sideline wanting to invest in real estate at a time when private buyers can afford mortgages right now and things like that. Why is that become such an attractive business model and is it part of the solution to the housing crisis or is it part of the problem do you think?
Brandon Snow: I think it is both part of that Ms. Park, both the poison and the cure. The reason that there has been such an interesting as the past few years you've seen is historic rises in rents. You've had effectively free money, very low cost of capital and so the ability to build and finance these large prime and a huge demand, by the way, increase in demand for single-family homes, as well as rental of single-family homes. The ability to put capital to work create a very strong cash-flow-generating model with a large build-to-rent single-family home community is very attractive. Probably becomes less attractive as the cost of capital increases, but the same time that the investors have a lower cost of capital than the consumer does. I do believe that actually there's a real benefit and there's a place that the build-to-rent industry provides two things.
One is, they're able to build homes fast and at a lower cost of capital, they also can provide a really good product, a consistent product if you're talking about an entire community. Whereas single and double home landlords that are not necessarily able to keep the level of quality of the service, the plumbers getting there, all that stuff. I think that these professional communities can provide a higher level of service at a lot of cases and I think they're also filling a need. Renting used to be the thing you did before you bought a home and owning a home is still very much the American dream for many people, but in a lot of cases it is no longer that. People actually prefer the flexibility, but they still want to live in a single-family home. Rental of single-family homes is a huge growth driver in the industry and there is a huge demand for that and a demand for a consistent product and so I think that they're filling that need.
Dylan Lewis: For a look from the home lending side, we have Brandon Snow. He's an Executive Director at Ally Financial, Motley Fool contributor and Marc Rapport interviewed snow about the cooling housing market and home-builder confidence.
Marc Rapport: Black Knight says at-home price growth fell by a full percentage point year over year in May and I think we're going to see more of that going forward, but that I'm not in a business. I just read about it. What signs of cooling are you seeing in the housing market? Any specifics?
Brandon Snow: Yeah. Everybody's got a view of where prices go and listen, they're up somewhere between 40 and 50 percent in most, call it key metropolitan areas across the country since the start of the pandemic so that's a massive number. It's great if you have been a homeowner and you've been able to take advantage of low rates and increasing equity position. Obviously, it puts the potential homeowner in a spot where they need to digest all that and figured out what that means for them. We are seeing not a downturn in home prices, but a deceleration of the pace of growth, so we look at things in two ways, year-over-year and then month-over-month. From say, April to May or May to June, the pace at which home prices are going up is definitely cooling off. They are absolutely still up versus this time last year so that does have obviously an impact on affordability in monthly payment. I think what you're seeing, honestly Marc and this is our view of the world is you're seeing a normalization of what has been really historical home price growth.
I think you are seeing some early signs and I think too early to react one way or the other, that market is cooling and this concept of a seller's market versus a buyer's market, which is something we all love to talk about, maybe is normalizing a little bit away from the seller to the buyer. We've seen things like more activity and sellers having to drop prices. We've seen things like more activity in the amount of contracts that were canceled in the month of June relative to where that number has been sitting. Earlier in the year, I think we saw something like 15 or so percent of executed sales contracts to purchase a home were canceled in the month of June, a number that has not been anywhere close to that really over the course of the last few years. Then when you couple that with things like consumer sentiment, so the University of Michigan consumer sentiment index is something we all watch and have access to via the news cycle that touch some lows telling you that we all as consumers are mindful of everything. We talked about the inflationary environment, that global political environment, and that effect on our day-to-day lives in terms of finances and budgeting. When you roll all that together, it does suggest that doom is not near, but that the market is softening a little bit relative to where it's been historically.
Marc Rapport: Yeah. You mentioned the University of Michigan. That's a widely watched, their consumer sentiment measure. I was just looking at the National Association of Home-builders, which is also a forward indicator, I guess that they just recorded the biggest drop in home-builder sentiment in the 35-year they've been doing that survey. Is that a sign of panic or is that just a sign of this bill? What does that tell us?
Brandon Snow: Yeah. Listen, I think some great quotes from the president of the NAAHB around what that means. I think it's prudent. I think if you also monitor any of the home-builder stocks and some of their forward-looking guidance and in quarterly earnings, they're being mindful of some of the things I just mentioned, I think maybe they're faced with something that us as a lender or a real estate agent maybe isn't faced with, which is rising material's costs and I know some of that is moderating too, but it's gotten more expensive to build a home. Obviously, they have to be mindful of building homes that people can afford so that they can balance supply and demand.
I think no builder would want to find themselves in a similar scenario that they may have seen back in the mid-2000s as part of that particular home crisis. I think they're seeing the same trend lines in terms of canceled contracts and obviously, that could leave them in a precarious position so it's a sentiment index and it's a measure of the way they're feeling. I think some of it is absolutely grounded in some data points we've talked about, but I just wouldn't expect them to be more measured as we navigate. What is uncertainty? I think no one can prognosticate for sure which direction we go, but I think we all have a view that is generally aligned and I think they're just trying to be prudent business operators.
Dylan Lewis: As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Dylan Lewis. Thanks for listening. We'll see you tomorrow.
