We’re gonna be talking today about weekly unemployment, the economic update, PPP status update, a lot of new information there that’s very important, the pandemic update. And then, of course, the development of this new real estate sector called the single-family rental.
Just as a way of background, those of you who know our firm and know me personally know that we’ve been representing folks in Florida for really close to 31 years now. And during the last great recession, the economic crisis, we helped thousands of homeowners navigate a situation where their homes fell in value. They were unemployed, we had to deal with the bank and do foreclosure crisis. And of course, we helped people figure out what to do with their homes and kept literally thousands of people in their homes as we were able. In many cases, to beat up the banks and deal with the banks in such a way that people could stay in their home, short sale [inaudible 00:01:30.052].
This time around, this is a very different type of crisis. Many people lost their homes…lost their job, not their homes, very quickly in this particular situation. And as we’ll see today, we don’t know which way the economy is going but we’re gonna be here as a firm to represent you all through this entire crisis. And we’re looking forward very much to assist you.
Today, we’re very fortunate that we have Ardevan Yaghoubi and I pray I pronounced Ardevan’s name we always call him Arde. Arde, I’ve known as a friend of the family. He’s a Ph.D. candidate from Princeton. He’s an Honor alumni from the University of Chicago studied at Oxford, and he has vast experience in national and international real estate investment. Currently, Ardevan is the Principal at Cambiar Management and Asset Manager based in New York, that invest in real estate across various structures and liquidity spectrum. So Ardevan it’s really a pleasure to have you join us. And I wanna make sure Arde’s sound is on so he can chime in and then he’ll take over.
Ardevan: Sure. Roy, thank you so much for having me, I’m really excited.
Roy: Great, well, we’re thrilled to have you too, and the whole family sends their very best to you and to your family. Okay, let’s go on if we can. Our last discussion as many of you recall about the different regions and countries are doing, what they’re doing to control the pandemic and the results that we’re seeing. This week we’re gonna talk about the panorama of our nation and its economic recession, as well as the pandemic. And of course, the big social events movements that are translating to this entire country right now, and how this is all gonna affect the real estate market. And in particular, single-family rentals, which is really a new construct, a new concept that [inaudible 00:03:14.491].
Zillow… Can you go back, please? Zillow’s last ad just recently in the commercial, “It’s times like these that we understand the real value of a home.” And so this is…you know, and a home takes on so many different contexts. And in the last crisis when people were losing their houses we were trying to explain to people you may be losing your house, but you’re not losing your home. How do you explain that to your kids? This is, of course, a completely different crisis. And again, we’re here to help us all navigate this. Thank you.
I wanna talk a little bit about the weekly unemployment data because it’s absolutely fascinating and also confusing. The Department of Labor announced on Friday that unemployment had actually gone down to 13.3% from 14.7% in April, and the stock market perceived it as a pleasant surprise. I wanna go on to the next slide, but [inaudible 00:04:05.774].
As we can see here…if someone could take the mouse. We saw that 22 million people lost…had gotten…we created an economy where 22 million jobs were created between 2011 and 2020. Specifically, right here we can see all the job creation that occurred right here. And then we saw how many jobs were actually lost in the month of March 1,300,000, and then 20 million in the month of April. And the surprise, of course, is that in the month of May…there’s that little increase there. Please go back. There’s a little increase right here, that little notch. [inaudible 00:04:49.582].
Woman: Can’t see the mouse.
Roy: Okay, can’t see the mouse. Okay, anyway, if everyone can see at the bottom right I thought this was a pointer, I apologize. We can see that there’s an increase of 2.5 million jobs in the month of May, which was somewhat of a surprise to the, I guess, [inaudible 00:05:09.909]. If you go to the next slide. The big issue, of course, is that even though they’re saying unemployment is 13%, the real question is how that gets calculated? Who’s not in the labor force? Who’s looking for jobs? Who’s getting unemployment? Who doesn’t wanna go back to work necessarily because they’re collecting unemployment? And that becomes a real issue. And the big issue, of course, are the folks who have been furloughed.
I wanna add that this is an interactive process I like people to ask questions, to have comments, you know, Ardevan and I can’t do this for an hour unless there’s some sort of feedback here.
Ardevan: Can I comment Roy on the previous if you go back to slide nine for a second? I think this is fantastic to see this depicted visually. I mean, maybe one thing would just be…I mean, 2.5 million rebound in May, would suggest, you know, roughly, call it 12% of the total job loss in 1 month. So perhaps what some people are projecting forward is that you know, that month 2.5 million is not that much relative to 22. But if you sort of think that that’ll continue for another six or seven months, we could be back, sort of close to previous employment. So I think perhaps that’s part of why people got so excited about the number.
Roy: We have a question here, it’s mystifying how the payroll estimate could be 10 million off from the actual number. We’re kind of gonna go through how that could be, you know, some people think it’s somewhat nefarious. But, you know, I think that the Department of Labor, you know, has statisticians and this is all new territory for them too of what you calculate, what you don’t calculate. They have tried to correct it, but it doesn’t seem like the markets really care.
Next question. Will this affect capitalism as we know it? You know, that’s a political question and we’re not here to discuss politics even though Arde and I are both students of politics. Arde, actually was a Ph.D. candidate in my very department, department of politics where I graduated from Princeton. But today, I think we’re more like the folks who are delivering information for you to come to your own conclusions. And we’re the folks who are trying to explain this to you, as opposed to give you our political view, so I won’t answer that question. We can go to the next slide. Ardevan, you’re welcome to chime in on that. But what do you think as it relates to capitalism?
Ardevan: Above my paygrade, Roy.
Roy: Most politicians get paid less than you so maybe below your pay grade, let’s not go there. But the pandemic is a… Okay, so next thing we wanna talk about is that you know, if we can look at the numbers, the number really isn’t 13%, 14%, 15%, 16%, but you know, it’s close to 17.9%. Because we’re not including people who are maybe afraid to go back to work, or taking care of sick family members, or caring for children because no school really hasn’t been in session the way we know it.
Another question. What do you think about the quality of jobs that came back? Job loss has really focused on retail and hospitality and white-collar has been spared for the most part. But now we’re seeing firms like Deloitte lay off huge swathes of their workforce. It’s gonna be interesting to see if the white-collar folks are going to be able to replace their positions from white-collar. Or if in fact, they’re gonna have to take positions like being Uber driver or working for Amazon, or if they can, you know, find their own consulting gigs to do their own stuff.
I mean, the problem is that the economy has slowed down, and when the economy does slow down, by definition, there’s this contraction that goes on and the velocity of money slows down. And therefore the kinds of jobs where there’s big law firms and big accounting firms have less business and less work for, you know, their employee. Arde, any thoughts on that?
Ardevan: Just the only thing to say here, again, not to be too optimistic here. But given the difficulty of hiring in this environment where you can’t really interview, you can’t travel that easily. You know, maybe it suggests that the unemployment, you know, numbers will get significantly better when people can actually travel and hire and have some certainty about their businesses going forward, so they can actually allocate for, you know, labor.
Roy: I mean, what’s interesting we’re seeing around the rest of the world that many parts of the world are opening up and things are almost normal life. Whether it’s Israel or Paris, you know, we’re seeing videos and pictures of people going to the beach, going to restaurants not wearing masks, they’re not social distancing. And so if in fact, that is in our near future, regardless of the pandemic then that would be optimistic. The real issue though, are we gonna see second spikes, but many of these places haven’t yet seen these second spikes. And so it’s gonna be kind of interesting to see what happens. Obviously, it’s gonna be two steps forward, one step backward. This is gonna be just an upward spiral, like…or staircase, like you’re suggesting.
Next slide. So if we take, you know, every one into account who’s not working including part-time people who wanna go back to work, furloughed workers who weren’t included in the original estimate, you know, the 13%, 14%, 15% reaches closer to 24%. But of course, when we were at 3% that probably more like five or seven. But the real number right now is that people who would like to work or can work, you know, is closer to 24%. Okay, I think we’re on to the next question…Are we onto a question? Yes, no, not yet, okay. Anyway, so if you combine all of these folks we’re talking about close to 27%. Okay, let’s move on.
Okay, so we have some takeaways here, doesn’t mean that the indications recovery are false. It doesn’t mean that the unemployment numbers are not a clear indication of real damage, we all know that. Unemployment numbers only give a part of the picture by including unofficial…unemployment is still possible to realistically hope for a fast recovery compared to the sharp decline. What’s really interesting, everyone is really talking about these V curves, you know. And we’ll see with the stock market we’re starting to see that the question is will unemployment continue to be a V or is it gonna be a U with some sort of tail? And so that’s what we’re gonna be looking.
Okay, so the real question is this when did the current recession officially start? Most of you did hear that we are in a recession. So the question is, when did the recession start? Did it start January, February, March, or April? And many of you know the answer because you’ve read it, but many of you have…you know, this is a technical question. And so many of us would have thought that maybe the recession started when the pandemic started, that would, you know, normally be the thought.
But the response is 47% of you said in February, which is, in fact, the right answer. But many of you said 35%, 12% said, April and a number of you said, 6%. The reality is over half of us got it wrong. The pandemic is not what actually triggered this recession although it made it a lot worse but officially, we were in a recession in February. But of course, had the pandemic not occurred the subsequent quarters and economic injury wouldn’t have allowed February to manifest itself into a recession. You’re always looking through a rearview mirror when you’re determining when the recession has occurred.
Ardevan: Sorry, Roy, you didn’t tell me this was going to be a graded Zoom. Can we get [crosstalk 00:12:01.057]?
Roy: That was the easiest question of the bunch so get ready. And you’re welcome to chime in. But as I indicated, there’s good…as New York is reopening being that the stock exchange is in New York, we’re starting to see that economy, at least from a purely economic perspective is starting to react especially in terms of Dow Jones, or the S&P. I thought you guys wanted me to go fast, okay.
But in terms of which markets, you know, which sectors of the economy are doing particularly well if we look at the bottom, we’re seeing that utility is not doing particularly well. Finance is doing okay. But at the top, we’re seeing that retail is bouncing back. Technology services, commercial services, consumer durables, those stocks are [inaudible 00:12:48.575] in particular, in part because they were so beaten up and people had basically given up on those areas. And airlines, for example, you know, have done particularly well after doing so particularly poorly.
And I say do well doesn’t mean that people are running back but people are coming back, flights are full middle seats that were previously left for social distancing are gonna be given up finally in the airline starting in July. JetBlue announced that just I think the other day. Here’s another V shape, this is the V shape that we’re seeing of the stock market. But before we saw almost a triangle, and it’s funny it’s almost not V we’re looking at triangles. We saw a triangle of how the employment market had collapsed. Here, we’re seeing how Wall Street is literally a V and is back to where it started before the crisis in March.
Next question, the 2.5 million new jobs in May is the largest one month increase since? And Arde, maybe you know this answer. 2008, 2001, 1964, or 1948. And the answer is and let’s see, some people… Okay. So half of you got it right and the other half got it wrong. So half of you had 1948, which is the answer, and everyone else got it wrong. So since 1948, we have never created two-point-some-odd million jobs, 2.5 million jobs in 1 month. So that’s kind of impressive.
Next, PPP loan status, very important. Many of you we had encouraged at the time that this is gonna be a gold rush, is gonna be a mad rush to apply. And in fact, the PPP program originally ran out of money, as many of you then know. There was a new allocation and there still is money right now you must be approved by June 30th. And so those of you who have not applied there’s still time to apply, but you gotta get your application in now because if it’s not approved by June 30th, technically it can get rejected. So you probably only have a few days to get it in because it probably would not get approved by the deadline.
But here are the modifications for those of you are small businesses or know people who took PPP money, it’s very important that we go over these. Borrowers may elect to extend the current period from which was originally 8 weeks to 24 weeks. That’s critical for people who couldn’t get rid of their entire payroll or the entire sum of money in eight weeks because many folks had been closed. Borrowers then have five years to repay the loan instead of two years. That makes it a lot more easy to repay the loan to the extent that’s not forgiven. But most of the loans, particularly under a certain dollar amount will be forgiven. And I think they’d announced I think two and a half million.
The interest rate remains exceptionally low so, of course, it’s a great deal of percent. And then the initial payroll expenditure used to require that you spend 75% on payroll and 25% on very limited items such as rent or mortgage. Now it’s 60% on payroll, 40% on other things, and those other things have been expanded. And borrowers may now use an extended period of 24 weeks to restore their workforce and wages to the pre-pandemic level. Before it used to be by June 30th you had to restore it and now you have till December 31 to restore to pre-pandemic levels.
And then there are exceptions. If you can’t restore your payroll to pre-pandemic levels of between January 1, February 15th, borrowers can now find…because you can’t find qualified employees, or because you take the position that, for example, if you were a store, and the store was shut because of the stay at home orders, then, in fact, you don’t have to restore it yourself to those levels. And you have to explain why COVID-19 was literally inhibiting your business from existing or being able to operate and thus you’ll be exempt from restoring at the same number of employees.
So we’ll be assisting lots of folks with those kinds of questions and have been and it’s our pleasure to continue doing. Additional classifications to qualify payroll, cash compensation, includes gross salary, gross tips, gross commissions, over time, allowance. And for those, you know, self-employed, you cannot pay yourself more than $15,385 which is equivalent of 8 weeks of salary on a salary of $100,000. If you’re self-employed, you pay yourself less than $100,000, you would not be limited to the 8 weeks, but you could expand that to 24 weeks, but the cap of $15,385 regardless if you paid that to yourself in 8 weeks, or through you know, the 24 weeks, you still will not be able to take more than $15,385 individually from the PPP program which is interesting.
Additional clarification, personal property items such as copiers, common business items like insurance, those types of items can now be calculated as part of the 40%. Previously, some of those items such as a rental copier, or even a rental automobile or a lease those could not be included in the 25%. And then interest paid on real and personal property including equipment, automobile, is now part of that 40% declaration. So for most people, if they keep good books and have a good accountant, good lawyer, they should be able to get most of your PPP forgiven. And that will be…
Ardevan: Roy, can I ask a question? I’m curious if you were to grade the PPP program, you know, in an A to F ranking how would you grade the overall program in terms of how it’s done?
Roy: You know, I’m a pretty strong proponent of it. I was, you know, taken back substantially when public companies were going to the PPP when they could have gone to the Federal Reserve, or to their own banks, or for the public markets, or bond markets to raise capital. So I felt that they were taking money from Main Street. But now that we’re seeing that they’re still, you know, billions and billions of dollars left for the PPP for small business, it’s suggesting the program has been remarkably successful.
Also, the stock market is a function, you know, when you pour $1 trillion, $2 trillion, $3 trillion into the economy, obviously, it’s gonna go somewhere. So ultimately, if people are able to go out, they can start spending on restaurants and continue to buy stuff on…Amazon is a major, major beneficiary of the PPP program, as is anyone who provides, you know, shop-at-home opportunities. And then anyone who’s providing good options like Walmart, where you just pull up and they just throw the stuff in the back of your car.
I have a sneaking feeling that people are gonna get used to it and are gonna get spoiled in some ways, this kind of concierge service. And we prefer not to walk into a Walmart and just have someone put the stuff in the back of your car, it’s really kind of [inaudible 00:19:08.118]. So I think seeing those kinds of changes. Ardevan.
Ardevan: I just think that you know, without taking a view about whether it’s the right policy or not. I mean, it was interesting that we started in some of the debates mostly on the Democratic side, discussions around universal basic income and UBI, which we’re seeing, you know, a year or two ago as being sort of way outside the mainstream. And then not only did they become the mainstream, it’s sort of, in a roundabout way ended up actually becoming policy.
And I think that’s just a…it’s an important change in how our government, you know, interacts with fiscal policy and so I think that it’s something that will continue. I don’t think this is the end of the innovation I mean, I think the government has now created this structure and will probably find other ways of using it in the future. So [crosstalk 00:19:55.123].
Roy: I think you’re absolutely right. I think what’s so fascinating the things that were perceived on the political spectrum as left or from one political party have become mainstream overnight. And UBI is not a new concept I’ve talked about this before. But Arde, do you know how old the UBI construct is when it was first envisioned in political textbooks?
Ardevan: I don’t know.
Roy: Over 400 years ago. So if you go back far enough, you’ll see that the idea of giving people money to stimulate the economy is not a new construct. And that it’s a concept that, you know, all boats rise when there’s enough of an economy to support it. But I think we’re gonna see more of that I think you’re right. And, you know, even concept like Medicare for all which was perceived originally as you know, ludicrous, I mean, the reality is that anyone who had COVID basically got free medical. I mean, they’re not gonna end up in bankruptcy because they ended up with a pandemic, you know, ailment. So, I think we’ve seen a lot of that.
Now, with the rental strikes and payments of foreclosures, you know, we’re seeing that homeownership or at least having a resident is becoming somewhat of a universal right. And so I think there are some major, major changes like we saw with the new…you know, after the depression, the Great Society and FDR that we’re going to see from the left and the right or from conservatives or liberal, certain constructs that we’re going to need to preserve…if we can go to the next slide, a certain amount of tranquility and peace in our society.
So we’re gonna have lots of new challenges that as a society we’re gonna have to deal with. And of course, one of the challenges we now have to deal with is transmission of disease, you know, between protests and opening up of society. And the question is, you know, will that set us back a step or will it not? But either way as a community and a society, you know, I think we’re gonna see major transformation, both economically and politically through this process. It’s fascinating to be living during this time is all I can say.
Again, you know, we’re gonna see some interesting changes as Vegas opens up, and as casinos open up and we’ll see what impact that’s gonna have on transmission. Arde, I’m gonna turn this over to you now but before that are there any questions, or did I miss any polling questions? Okay, are there any other questions from anyone? If you have questions on what we just went through I appreciate you all, just send them through. But Arde, why don’t you take over on the development of the single-family rental. And do you want me to switch your slides you know, do you wanna take over?
Ardevan: If I can share my screen, I think I can. Let me click.
Roy: Can you share it?
Ardevan: Oh, it actually says host disabled so that’s okay. I’ll voice over [inaudible 00:22:33.179]. So yeah, so just to frame this first, let me just sort of introduce myself and let everyone know who I am.
Roy: Speak louder. Just speak a little louder.
Ardevan: Sure. Sorry about that. So I’m Ardevan Yaghoubi I’m a principal at Cambiar Management. We’re a real estate investment firm based in New York we do things in public and private markets. We have led an investment on the private side in a single-family rental platform. But I’m gonna be speaking today just generally about what’s happening in the marketplace.
Single-family rental is a pretty small niche within the world of real estate, as Roy mentioned. I think most people are familiar with multifamily, and apartments, and sort of garden-style apartments, or dense downtown apartments. And single-family rental…you know, I included a picture on the first slide, just so everyone we’re on the same page is what it sounds like. It’s the rental of a single-family home, a traditional home that you would think of.
So the way I kind of wanna frame the discussion here is…and the thing I sort of want people to take away from, given the amount of changes that are happening in the world and the economy, you know, is COVID-19 a change, or is it an acceleration of previous trends? And you’ll see pretty clearly, I think, in a couple of slides that I think it’s the latter not the former. We can go to the next slide, Roy.
So clearly, you know, there’s been a lot of headlines about different markets, I included some of them. My favorite being “The New York Post,” which said “Middle-class rich people,” which I’m not entirely sure what that means, it’s just “The New York Post.” But clearly there’s been a lot of headlines and there’s been a lot of news. And so I think the next couple slides, I’m just hoping to disentangle that and let everyone know kind of what the data actually suggests. So we go to the next slide.
So the median home sales price was about 7.7% higher in Q1 over last year this time. You can see on this slide, it’s broken down by geography, the Northeast outperformed. But I think what’s really important to take away here is this is pretty significant price appreciation on a year-over-year basis. This is also the median home sale. So if you look on the left-hand side of the chart, you see the dollar sign. So the median home is somewhere between $250,000 and $400,000, depending on what geography you’re in. So this is kind of the most common home, not the high end, not the low end, you know, the median.
If we go to the next slide you’ll see a couple of cities, obviously the national average or the regional average is one thing. When you go one layer below that you actually start to look at individual cities, especially ones that perhaps people who are on the call live in or familiar with. I mean, some of the numbers are pretty astounding quite frankly. I mean, you can see here, Colorado Springs had over 14% appreciation, you know, New York and New Jersey Newark metro area had 8% appreciation, Naples and Marco Island had about 12% appreciation. So, you know, when you look under the hood of the regional numbers, some of these particular cities got quite a lot of, you know, appreciation, unless…
Roy: What we’re seeing now Arde, is that the velocity of home sales is decreasing for there are less listing. And so that’s not creating effectively a seller’s market because a lot of folks are hunkering down and they’re not prepared to make a move, they rather not, you know, they just wanna wait till things settle down a little bit. And so you actually…you know and also people are concerned about having people marching through their home, you know, to show a home. And so, a lot of realtor friends we have while they’re using videos and doing the best we can we’re seeing far less listings than we have in the past.
Ardevan: Absolutely.
Roy: So that is gonna create some additional pricing acceleration, I would think.
Ardevan: Yeah, and when we’re back to business as usual, you know, I think listings and tours will definitely be up quite a bit. So if we go to the next slide.
Roy: Just keep the volume up, Arde, if you could.
Ardevan: Oh, sure sorry about that I apologize I’ll speak up.
Roy: And then this is a good slide on mortgages proceed with that if you could.
Ardevan: Yeah. So the idea here is that, you know, granular data is sort of difficult to come by. So I wanna show it a couple of different ways to talk about sort of what is demand like right now. This chart shows mortgage applications for new home. So new mortgages, not refinancing. And you can see there it’s a little small, but it ticks up, you know, going into the crisis that’s really related to the change in interest rates, I believe. Goes way down as the crisis hits, you know, essentially no one was purchasing a home for the first couple of weeks to, you know, to a month. But we’ve seen a dramatic rebound just you know, the last bit.
I think what’s important here to note is that that V shape or that spike is now sort of normalizing and trending down. So on a week-over-week basis, which is very noisy, and I wouldn’t put too much stock into the data on a weekly basis, but just for information. On a week-over-week basis, the applications number came down 4%. So I think the idea is it’s gonna spike and then sort of just normalize a little bit, by contact…
Roy: If we do add the reifies, you know, it’s about as much as the bank can process. In fact, there was a period of time in the middle of COVID, that the banks were increasing their interest rates because they couldn’t deal with the flow of application. And so they had to just artificially increase [inaudible 00:27:42.596] in order to slow the application process.
Ardevan: Absolutely. So I think that data is very noisy, doesn’t tell you too much about price appreciation so I didn’t include the…you can see that data also. If we go to the next slide, commercial real estate…
Roy: Okay, before we do that…
Ardevan: We have a question?
Roy: Arde, I wanna go on to the next poll before we go to commercial, and lead you right into it. As of May, how much has commercial real estate retail and office decreased? It’s multiple-choice, 3%, 6%, 11%, or 14%.
Ardevan: This is value just to be clear it’s the value overall, not the…
Roy: The value, right. And we got a few people saying 11%, half of you saying 14%, and a few people saying 6%. And a lot of you said, 14%, but the answer is 11%. Eleven percent is the answer.
Ardevan: Yeah, and I think that the numbers I showed you about sort of median home price, those are pretty strong numbers in a vacuum. But when you compare it to what’s happening in commercial real estate, where property prices increased dramatically from ’09, and have now gone down double digits. I think that’s sort of an important relative basis to look at how residential is performing. So this chart comes from Green Street Advisors so it’s an overall macro view of all commercial real estate which would include office, retail, you know, urban, industrial, all that kind of stuff.
Roy: If you take out industrial, probably retail and office probably has dropped even more than 11%. So the folks who said 14% may actually be right.
Ardevan: Yeah, and you can look at some of the public equities as a proxy for malls and some retail names which are down, you know, 20% to 50%. Until recently, last couple of weeks have been different.
Roy: I mean, one great takeaway from this is that clearly, we’re seeing that the residential, single-family construct whether it’s gonna be for rentals, or if you’re owning the house, you know, for yourself is an area that isn’t being hit as hard as the other parts of the real estate market itself. I think that’s something we’re starting to see.
Ardevan: And at the end, we’ll talk about sort of whether we think that trend will continue or not. So I think it’s a question. So just last one on sort of like the very recent day-to-day action, if we can go to the next slide. This is Redfin, which generally has pretty good data. This is a somewhat squishy number, but it’s essentially how many people were reaching out to Redfin, you know, online talking to an agent, putting in offers, it’s sort of their aggregate demand index. And like, I showed you, this follows essentially the mortgage purchase applications, you know, goes down spikes. This data is as of May 17th, so I’ll be looking for the next update. I am guessing that that number starts to come down a little bit, but it’s still elevated sort of relatively.
And just to make it clear on that previous one, so 100 on that, just to note this, 100 is the seasonally…it’s fixed to January, February of 2020. So we’re actually well above January, February, sort of normal [inaudible 00:30:57.511].
Roy: Next slide.
Ardevan: Yeah, so the next couple of slides… So look, big picture let’s take a step back because I don’t wanna get too in the weeds. So you see a certain theme real estate prices diverge from commercial and residential. And so the next couple things I wanna point out to folks are what was the story about residential real estate broadly speaking going into the crisis? Roy, as you mentioned, I know you were very involved in ’09 and the restructuring. But I think as a consequence of what happened in the last crisis, and really residential real estate being kind of the culprit or one of the core drivers of the financial crisis…it was the core driver of the financial crisis. Things actually, we’re not overheated, particularly.
So these charts come from the Federal Reserve, which I think is, you know, an important body in these discussions. And you know, if you look at the chart on the left home appreciation from sort of 2014 has essentially been stable. So homes have not been appreciating. This is percentage on a year-over-year basis. So appreciating somewhere around 5% a year. But you know, it’s not dramatically trending upwards there’s no sort of, you know, exponential growth happening there.
On the right-hand side, this is a price-to-rent ratio, essentially looking at how much does a home cost versus renting. And the Fed is also telling us here that it’s essentially at the long term average. So home prices are not particularly elevated, you know, on a sort of macro kind of longer-term view. If we head to the…
Roy: If you look at that huge spike you know, in 2009, I guess 2007, you see that iceberg just popping up.
Ardevan: Yeah, it went vertical. So that’s very unlike, I think, you know, anything that we’ve seen since.
Roy: So what does that mean to an individual? It means that the price of the home was much more expensive than it cost to rent is that what we’re saying there during that period?
Ardevan: Yes, essentially that, you know, the price of buying was elevated and they fixed it the right-hand side is just a proxy number. So you know, it got much more expensive to buy a home than to rent. So that’s essentially what we’re saying in 2009 but today…
Roy: So now we go on to 2020 and we see that the two have come back into somewhat equilibrium.
Ardevan: Yeah, home prices are not particularly elevated over rental renting.
Roy: Exactly.
Ardevan: And if we look here, I mean, going into this crisis, when I say pre-crisis, I mean the COVID-19 crisis. On the left-hand side, this is data also from the Fed. Oh, sorry, if we could go forward.
Roy: I wanna do a question first. There’s a question and I wanna give the answer. Here we go. What percent of homes had negative equity at the end of 2019? And this is important. What percent of homes had negative equity, meaning they were upside down, meaning that the house was worth less than the mortgage in 2019? How many people had no equity in their homes, you know, before COVID? And most of you got it right, 56% said 10%, a number of you said 15% [inaudible 00:34:09.956]. But the answer is 10%.
Really, almost all homeowners had some equity in their home except for about 10%. Now that we thought was gonna change dramatically with COVID, but as we’re seeing except for people who can’t pay their mortgage, because they’re unemployed, we’re not seeing a devaluation in the housing stock, that was the prep, which was the major, major component of the bubble and the crisis left. We had an artificial bubble that we saw where homes were far more valued than the rental value. And therefore people saying, “Shoot, you know, I might as well just rent my home somewhere else because it would be cheaper. So if I got rid of my home I could rent the same home across the street.” And in fact, we did that.
Arde, we actually did that where people gave up their home and rent the home across the street, and they were paying less or they ended up renting their same home from the bank for less than their mortgage. But we’re not seeing that in this crisis. Anyway, I thought that was a very important thing.
Ardevan: Absolutely. And I have this on a bullet I didn’t mention it. I mean delinquencies have ticked up since corona started they’re at about 8.5% now is the most recent data. But that being said, even if it ticks up a lot, given that it was trending down for years and years, from leverage at a debt perspective, there’s a lot of equity in most homes. And just contrast that with an arena like hotel or office today where you had people borrowing, depending on where you were 60 to 80% of values come down 20% to 40%, depending on what kind of asset you own. And actually, you might have way too much debt on some of those assets.
Roy: So anecdotally, that’s funny, you know, when we were doing foreclosure defense, it was for…they were the cottage industry of law firms and all they were doing was bringing foreclosures and they were huge, and they had hundreds and hundreds of lawyers. Most of those lawyers have been laid off at the beginning of COVID. And they’re not brought back anytime soon, because while there could be an onslaught of some foreclosures for people who’ve lost their job, the reality is because you have equity in your home, you can still do a modification, you still can do a short sale, you could sell it. You don’t have to do a short sale, you just do a regular sale, because you have equity in the home.
And because of that there gonna be so many more opportunities to negotiate with your bank, because your bank knows you got equity, and so they’re willing to work with you and ride with you. Unlike last time where the property had lost so much value they had to get out and just recalibrate that value of the home.
Ardevan: Absolutely. And remember, home prices have been appreciating, you know, at least in the last quarter. So, you know, even if there’s someone that might be in trouble today, if you sort of wait two quarters and we continue to see growth, there might be some [inaudible 00:36:37.365]. I’m cognizant of time so just I wanna get to the next couple ones a little bit. This, I think, is probably the most important chart and for the rest of the slides we’ll be talking about sort of single-family rental everything previous was just the housing market in general.
So I think this is by far the most important chart. I’ve called it my favorite chart in the world. I think it explains a lot of our society and in our world. This is age of U.S. population by age. This is from the 2018 census so you gotta kind of pull the numbers forward two years. But look, what does this suggest? The modal age in the U.S. is around 29 years old. I’m in my early 30s as is Mel, Roy’s daughter, who’s a very good friend of mine, you know.
I think term millennial is a little disingenuous, or it’s not accurate. I prefer to call us the echo boomers. So the baby boomers all had children, we are their children those are the echo boomers. And you can just see there’s roughly 500,000 more echo boomers than there are people who are 10 years older. So if you just look, sort of eyeball it, there’s about 4.5 million 25-year-olds, and, you know, there’s something closer to kind of like 4 and a quarter, you know, 40-year-olds. And so I think that has huge effects for the broader economy, but specifically, housing which we’ll talk more about.
So what’s driving sort of the single-family rental market? It’s really a lot of millennials and echo boomers and household formation specifically. So household formation is a fancy term for, you know, finding your partner in life, getting engaged, and hopefully married. And then the sort of the natural or the next logical thing to do is, you know, to have children. And, as a consequence of having children, that’s…you know, you’re now a full household.
So in terms of historical numbers, households in the U.S. have increased by about 1%, every single year from 1990 through the end of the year. And so when you look at that cohort of the average 29-year-olds, you know, or the median sort of late 20s person, you know, we think there’s gonna be a pretty big increase in household formation going forward. And Roy, you’ve asked the question so I’ll let you…
Roy: Well, it’s just a continuation of this whole notion of household formation. You know, what two states are creating more households than any other two states in the nation? Some cases, quite an entire region. And it’s not a trick question, but it…and it’s partially intuitive but not fully intuitive. Many of you, like myself would have thought that California was one of those two states. In fact, over half of you think California is in one of those two states. Well, it’s not. Many of you think, or a few of you think that New York may be one of those two states, well, it’s not. And so when you’re down to it, you’re down to Florida and Texas and half of you got that right. So if we go to the next slide, Arde, you can explain.
Ardevan: Yeah, this is essentially the same data just shown geographically. I think the key takeaway here is people are moving to lower-cost places. And so the Southeast Texas and southwest, I think are all benefiting from, you know, shifts in population, folks moving from New York to Florida, or California to Texas. And, you know, let’s talk about Corona in this context. I mean, we’ve all been working from home for four months, I think that is a new feature you know, of our economy that you can really sort of pick where you wanna work from, in many cases. And so these trends…honestly, this data is probably not even up-to-date I think we’ll probably even be more strongly in favor of Texas and the southwest.
Roy: But clearly, the virus is going to accelerate another trend of Florida and Texas being hot places for people to move. And I’m not trying to be funny here, but it’s hot, the virus regardless does better under UV high vitamin D condition. Most of the folks who ended up in New York City hospitals had vitamin D deficiency. And you could argue that the disease caused the deficiency or they came in with low vitamin D. But the reality is that many folks in New York and Boston and other cities like Philadelphia and D.C. are vitamin D deficient because of the weather. And so what we’re seeing is that people are chasing the sun as they have done for millennia, you know, for thousands of years. And so we’re gonna continue to see that going on. And so…
Ardevan: I wanna leave some time at the end because I know we have questions and stuff. So if we can just hop to the next slide. Okay, so in this context, you’ve kind of got a lot of echo boomers, you sort of…home prices seem to be doing well coming out of Corona. So kind of this makes sense everybody’s gonna buy a home, right this is sort of…be a logical conclusion. When you actually get into the numbers, though… And I apologize that the numbers on the right-hand chart didn’t actually come through, I’ll verbalize them for you.
You know homeownership is still a very expensive endeavor. And so if you just look on the left, you know, depending on where you are, and what you’re buying, you know, it costs anywhere between 25 to even 100,000 plus dollars, just to actually, you know, put your down payment and closing costs and actually close on a home. If you remember the median home price, I mean, median home prices are sort of around 300,000 big picture. So this is still a significant amount of money you need just to buy the median home.
On the right-hand side what this would have shown apologies for the formatting snafu. But essentially those same folks that we were talking about before, have very limited net worth. So the left-hand bar, sorry, the smallest bar is net worth under 35 which I could have done this as a poll question. It’s $4,700. So under 35-year-olds have very limited net worth, again, as a consequence of some of the other things that are happening in our economy. But simply the idea of shelling out $100,000 sort of on your own is not super plausible. If you go to the…
Roy: And then the reality is that the last economic recession set back those families dramatically where in the past, you know, a gift letter was typical. As you know we have a title company we’ve done thousands and thousands of closings, you know, typically we would always see gift letters from parents and grandparents when people were buying their first homes and it was very customary to see that. We see less and less of that today…
Ardevan: Interesting.
Roy: …than 15 years ago. And the reason for that is many people’s net worth never got restored after the Great Recession many families didn’t. And so a lot of these folks who are coming of age, you know, are concerned about tying up their house, their primary capital in a house, when in fact, they saw what happened to their parents when they got caught in the last bubble. We have two questions here, Arde, let me ask you. One is, doesn’t the data change based on geographic markets and also level of income?
Ardevan: Yeah, absolutely. I mean, $75,000 in suburban New York, you know, barely gets you a Tory. So yet clearly, where you are matters a huge amount, your income level matters a huge amount. But it is fundamentally…I mean, net worth is fundamentally related to age and number of years in the workforce. So all things being equal, if you’re 40, you’ve got 10 extra years in the workforce, than someone who’s 30 and you know, the liquidity and net worth will show that.
Roy: And this is a great question. This may be the $10,000 question, would this be a good time to rent or buy an apartment in an urban area given that the population may move out of big cities? I would say this is a good time to buy a place in an urban center that’s been hit hard by people moving out to the burbs.
Ardevan: Yeah, I wish I could say this is above my paygrade but this is my job. So I have some views and I think that…you know, at least the way our firm has chosen thus far to make that investment is really by looking into the single-family market, which is actually the next slide. So I’ll talk about sort of single-family rental and why single-family rental is kind of the solution to this problem. I realize that’s not a great answer but it’s a difficult question.
Roy: I’ll answer that. I think that cities have to hit rock bottom before that opportunity presents itself and at that point, you will have unique opportunities. But you know, cities have not hit rock bottom by any stretch and I pray they don’t to the extent they do, that’s when the vultures that’s when the investor will come in. So, you know, I would only do it because you wanna live in the city, you want that urban life and that’s something you’ve always wanted. I wouldn’t do it because you think it’s a good investment.
Ardevan: So single-family rental… And again, apologies, we lost some of the formatting. But SFR is really the natural choice, given the previous slides and everything that’s going on with price and cost and needs. So what this actually shows is that the left hand most is basically essentially, apartments really only have two or fewer bedrooms, going right from the leftmost is three, four, and five. And so you can see actually the apartments which are in the lighter color, essentially, big picture, very few apartments have three, four, and five bedrooms.
And that makes complete sense because if you’ve ever invested in or done a deal for an urban apartment, the economics of that third bedroom, it takes you know, just as much space and you’re not able to charge the same percentage rent. So, think of this in the sense of a 2-bedroom will go for 2,000 you know, a 3-bedroom no one is gonna pay you 3,000, they’ll pay you 2,600 or 2,500. So the unit economics of the third bedroom in that square footage brings your overall rent price per square foot down.
So as a consequence, what do families do? Families go to homes, and that’s what the chart on the bottom shows. Only 48% of families in the U.S. actually choose apartments, about the other half more or less live in homes. By contrast, non-family renters are about 71% in apartments, and that makes complete sense you’re living alone or you have a roommate or two you know you’re not looking for 3 or 4 bedrooms.
Roy: I guess we’ll go to the next question. What percent of the rental housing stock was built after the year 2000? Ten percent, 15%, 20%, or 25%. What percent of the rental housing stock was built after year 2000? And this was an interesting question, 10%, only 5% said that, 15% said 30%, and a number of you thought it was 25%. Most of you thought it was 20%. The reality is that most of the rental housing stock… And Arde, I’ll let you give everyone the real answer to that.
Ardevan: Sure, if we just head to the next slide. I’ll voice the numbers. So I think the key metric here is that only about 15% of single-family rental homes are from 2000 or later. And I’m sure most folks here either own their own homes or their parents’ homes and you sort of know that a home built in 2005 is very different than a home built in 1975.
But just to take that number 1975, about a quarter of all single-family was built between 1960 and 1980. And just think about all the changes that have taken place, you know, from working from home, the most recent all the way to my wife’s favorite which is the garbage disposal. And there’s just been tremendous changes, but the housing stock is actually very old, is really the takeaway. So we don’t really have in the same way that we have in a lot of downtown areas a lot of new building in single-family.
Roy: On slide 40…Arde, on that slide 40 there was something I cut off, maybe you could [inaudible 00:48:38.076]
Ardevan: It’s gonna be a little tougher, right, maybe we could just…I think the general point is sort of that, you know, [inaudible 00:48:44.432].
Roy: Okay, we made it. Okay, great. And this is where the answer is to the question.
Ardevan: Yeah, this is sort of I think…this is, you know, sort of the key takeaway on SFR specifically, single-family rental is a very small part of the overall housing market. So you have about 124 million housing units in the U.S., that’s the left-hand pie. That gets converted to about 47 million rental housing units. The dark blue is SFR, as well. And then you end up with about 16 million SFR units. So what does that actually mean? I mean, I’m sort of throwing numbers at you.
But essentially, the single-family rental market is actually very small relative to the overall aggregate size of the U.S. housing market, which, as everyone knows, is one of if not the biggest asset class in the whole world, trillions and trillions of dollars. The specific number of single-family rental product is very small.
And just the way to think about this is there’s a couple of publicly traded names, the aggregate market cap for those is roughly about $25 billion of aggregate market cap or single-family rental. You have technology companies pushing a trillion and obviously many other types of companies well above that. But if you were to look at that number relative to the overall size of the market, it’s actually still small. So this asset class is still pretty tiny and, you know, it’s part of a pretty big [crosstalk 00:50:09.297].
Roy: So 124 million total housing units, 47 million are rental housing so that’s around 20%, right? A little more about 40%, right?
Ardevan: Roughly, yeah.
Roy: And then of that 40%, 60 million are units that are owned by third parties. And so now let’s go to our next question. And what percent are those single-family rentals own third parties institution? Two percent, 5%, 40%, or 50%?
Ardevan: Yeah, an institution will be a non…you know, a professional real estate owner who is part of a company not just an individual owning.
Roy: A great irony for those of you who’ve been watching this real carefully, the answer was on the slide in front of you, but it was buried. So we actually…this was an open book test and let’s see how many of you fail. And the answer is virtually all of you. Intuitively, it is hard for us to believe that only 2% of the housing stock is owned by institutions. Now you have third parties that do own it, mom and pop, but only 2% of it is owned by institutions.
So 15% of you got that right. And most of you took the sucker answer, which is 40% and it’s not that. Most homes are still owned by individuals or by small groups, and this is just an area that Wall Street has shied away from until now. But as Ardevan is gonna explain, this is something that big, big, big money is now pouring into.
Ardevan: Yeah, and I think the thing to say here is that what’s the difference between an institutional owner and a mom and pop? Well, an institutional owner has economies of scale, right, they have a management company, they can do maintenance better, they can do all that stuff better. They can market better, you know, they can price things better, because that’s their job.
So I think as you start to see more institutional ownership, less mom and pop ownership as we’ve seen, by the way, in, you know, once upon a time retail used to be owned by the retailer, right. You were selling hats or something, you know, in downtown New York and you owned your real estate. And then those two things separated and the retailer became JC Penney, and the landlord became, you know, Seldovatt [SP] or another real estate company. So I think you’re gonna start to see that bifurcation. It’s already happening clearly but will continue.
Just cognizant of time, if we could just skip maybe to the very last, we’ll skip the stats. This is the last thing I just want to mention for everybody. We only have…this is total housing supply in the U.S. You know, we only have about 5 months of supply based…sorry, 6 months of supply based on the May 2020 numbers. If you just look at what was happening around the recession and the financial crisis, we ticked all the way up to, you know, 9, 10, 12 months before things corrected.
So how housing supply, in general, is fairly limited. And by the way, that’s just the main number. So if you think that your, you know, numerator is going up, the denominator here will come down as well. So we could be in a situation potentially where housing supply overall in the country actually gets even tighter than it is.
Roy: And I know that the new housing…the companies that are building new houses are doing remarkably well on Wall Street. So it may suggest that they don’t even have enough supply for those people who wanna buy single-family homes right now.
Ardevan: It’s very early to tell, but the anecdata suggests that, you know, those guys are running out of inventory, especially at lower price points, you know, around the median price point their inventory is pretty tight.
Roy: And what we’ve also talked about is that the single-family home is gonna be redesigned to create office nooks places where people can work and almost create like their own workstation. Doesn’t have to be the entire room there’ll be a workstation where they can work from home and be able to zoom and have a sense of differentiality between where they’re working in their home and the home that they use for their home. And I think you know, the apartment, the two-bedroom cookie-cutter apartment just does not accommodate that kind of permanent living condition.
Ardevan: And then just to wrap it up real quickly, you know, there are a lot of known unknowns… Oh, we can go to the very last slide questions. There are a lot of known unknowns. So, you know, household formation is a great example typically, in a recession, household formation goes down. I mean, I was invited to 11 weddings this year, all of which have sort of been pushed to 2021 but we’ll sort of see what happens with household formation. I think work from home is another great example, you know, are we gonna be gonna the office, you know, three days a week or one week, a month? I think those are some questions to be answered.
You know, the housing supply, right, if builders really sort of see the demand out in the market and they bring…especially given unemployment levels, folks can generally move into construction. It’s actually one of the best employment sectors of our economy, who can move into construction. Maybe you’re working on the oil patch in Texas, and now you’re actually on a construction job. So maybe we could actually build a lot quicker to meet demand than in previous cycles. So there’s a lot of unknowns and there’s a lot of questions still so I hope this was helpful just to give people a sense of…
Roy: Arde, there’s one question that people have and it probably is self-evident to you but not to everyone. Why is single-family rentals a better deal? And how is that created for the tenant by the institution?
Ardevan: Sure. So better deal in which sense, financially or from a…?
Roy: Better deal why…I mean, we talked about the down payment, but why does single-family rental work for a tenant?
Ardevan: Oh, sure. Well, let’s talk numbers, and let’s just talk lifestyle. Numbers-wise, generally single-family is around the same price as multifamily. And that’s what has to do mostly with the price of land and the price of construction. So to build a home in a suburb of, I’m gonna pick this name out of a hat, Austin, Texas, you know if you wanna buy land in downtown Austin and build an apartment building… And again, I don’t have specific data, I’m making these numbers up but bear with me. You know, you’re gonna end up paying $500,000 per unit to build a new multifamily building in Austin.
So the rent, you’re gonna have to charge to recoup a decent investment on your 500,000 per unit is gonna have to be x. Well, if you can build a 3-bedroom home in the suburbs of Austin because your land price is lower and maybe construction cost is lower, you can build it for 350,000. You can afford to charge a lower rent or the same rent essentially for a bigger space.
So from a macroeconomic perspective, you know, it’s cheaper housing than downtown, urban, amenitized, you know, multifamily. From a consumer perspective of like, why would you do this as a lifestyle choice, you know, it gives you flexibility, you have the ability to have a one-year lease or a two-year lease. You’re not buying yourself into, you know, a large asset that you’re taking leverage on by a mortgage. And it’s a low maintenance lifestyle. I mean, you know, most folks especially…I didn’t mention this, but especially in the echo boomer and millennial generation are two working parents. Myself and my wife, I know, Roy, your kids as well.
So, you know, if both people are working, the amount of maintenance that’s required just to manage a home is sort of a product of a previous era. Nobody really has that much time to coordinate maintenance and, you know, landscaping and all that stuff. I’d rather and I think a lot of people would rather simply just pay a small fee to a landlord to manage all of that for you so you can focus and spend your time on what’s important with your family and…
Roy: And it may be a little cheaper because there are economies of scale that are involved if they’re doing it for 50 or 100 or 500 homes as opposed to you doing it just for your house. The other thing is the carry on the house. You know, the 30-year mortgage is not the most efficient way for someone to finance a home and for political and socio-economic reasons have been around for a long time. But even Greenspan, when he was the Federal Reserve Chairman, he complained that people were wasting their money on fixing their homes at 30 years because they wanted to live there 30 years. So they were paying insurance and they were paying for something that they were never gonna use. And if you have large institutions that own these homes, obviously they’re gonna be able to carry that asset at a much lower interest rate.
Ardevan: I didn’t know that about Greenspan. I’ll have to find that quote, it’s helpful.
Roy: Oh, yeah, he said that years ago. I think we’re running out of time. Are there any more questions or not? There are no more questions. Arde, from Cambiar Management, I wanna thank you, you’ve been great. And…
Ardevan: Thanks.
Roy: …we really appreciate you joining us. Again, everyone…
Ardevan: Thanks for having me.
Roy: …Weston Title, Oppenheim Law, for those of you your first time, just so you know, we’re here to assist you in every way possible. Whether it’s dealing with COVID, or whether it’s dealing with acquiring your dream home or even renting a home from an institutional landlord, we will review those options with you too. If you don’t knowhow to reach us so “Zoom at Noon,” Roy Oppenheim. Again, on behalf of Ardevan and everyone at Oppenheim Law, I wanna thank you for joining us today. Have a great day.
Ardevan: Thanks, everybody. Thanks, Roy, really appreciate it.
Roy: Take care.
Ardevan: Bye.