 The way I would summarize it was we were selling three homes per community per month, and we're gonna go to two, which is more of a normal number. Welcome to the Smarter Building Materials Marketing Podcast, helping you find better ways to grow leads, sales, and outperform your competition. All right, everybody, welcome to Smarter Building Materials Marketing, where we believe your online presence should be your best salesperson. I am Zach Williams, alongside my co-host, Beth Pofnyglov. We've got a guest today who I'm super excited to chat with. We started prepping and almost didn't even get into recording because the conversation is just gonna be so good, right Beth? Oh man, I'm excited. John, we're so excited to have you back. We have in the studio with us today John Burns, CEO of John Burns Real Estate and Consulting. He honestly probably needs no introduction. We've been having such incredible conversations about the economy, the future of the building industry, what's happening, what's going on. So we brought in the man himself to help us make sense of it all. John, welcome to the show. That's gonna be tough to live up to, Beth. And it's not the man itself. I've got more than 100 team members who make me smart and I just have to have my name on the doors. Well, we're excited to reap the benefits of all of your and your team's hard work and really we should just call this show Zach and John nerd out and Beth is glad to listen. John, so I did a healthy amount of prep today in advance of our show and I have a million questions that I wanna ask you but where I really wanna start is just taking a little bit of a step back and looking at the state of the economy. I feel like over the last 24 months it felt like every day was a new economy. You really, I mean, especially as we got through COVID it was like every day you felt like, okay, was something gonna be different. And one thing I've really valued about our relationship and just honestly the content you put out is you really try to get people to look long-term and go, okay, here's what's gonna happen long-term. Here's how we see things, here's how we're projecting out. Sometimes that's easier than other times but I'm curious to get your take like right now as we're recording this episode if you zoom out the next 18 months tell us what you're seeing, what you're hearing from a housing standpoint talk to us about how this is gonna impact the building products industry. Yeah, I love discussing this with you because it's somebody who has employees has a different perspective than somebody who just does spreadsheets. You know, I think that's important insight for all of us that have had to go through this whole post COVID thing. So to look forward to the next 18 months I'm gonna be back up a little bit. I mean, we had a very long expansion, 2019 the market was starting to get frothy and it was starting to slow down a little bit because of that. And we kind of had our risk on hat on towards the end of the cycle. Then we all know what happened but prior to that Powell was dropping rates to get the economy growing again because inflation wasn't at that two to 3% and the economy wasn't at that two to 3% that they wanted. So they were using our industry to try to get things there and they created frankly too much home price appreciation then COVID hit, they did tremendous stimulus which you and I were discussing before this you know, maybe it was retrospect someone's gotta say it was too much but if they didn't do anything it would have been Armageddon and I think those two pulled off a miracle. If anybody wants to read on that read a trillion dollar triage by Nick Timrose at the Wall Street Journal I feels to me like it was co-authored by Jay Powell and Steve Mnuchin and Warren Buffins recommending it so if you don't care about my recommendation listen to him. But what they have been doing to pull us out of that rabbit hole where we had all the retail and service sector companies really struggling was let's get housing going and man did they ever. So we saw and I'm gonna say it this way for a reason four to 5% home price appreciation per quarter per quarter for seven quarters. Okay, as we sit here today towards the end of August our homeowner clients have dropped home prices 5% in the last three months which is probably the fastest correction in my lifetime. I mean that's- More than 08? More than 08, yeah. I mean the total in 08 was way worse and it went on really long but the reason is it's like you know what they all knew this was gonna come to an end. If I say 5% price decline that sounds like absolute Armageddon and it really stinks if you bought a house ride at the top of that market I totally get it but if you just raise prices 5% per quarter for seven quarters in a row and you gotta give one quarter of it back and you're sitting on your highest margins ever your best balance sheet ever by far you've gone to the bond market and borrowed money at a really low interest rate at a fixed interest rate that's not due for many years from now. Yeah, you're making tough statements on your earnings calls about things not being so great year over year but you're still kicking butt and the reason I point that out is that's what it feels like to me is like you know what, this is not Armageddon. I believe there's gonna be a recession but I am well equipped to get through this recession as all of us will hire people not everybody works out so you'll let the people go who probably aren't working out but damn you're gonna hold on to everybody else cause you remember how hard it was to get those really good people and we're not seeing layoffs. And on the building material side our clients have been asking us the whole time when this boom was going on and the under supply story should I be ramping up and building a new plant and if we're gonna get to two million housing units per year on a sustainable basis I'll go ahead and do it and we've done all the demographic research and said that ain't gonna happen unless they open up the floodgates to immigration that's not gonna happen so the building materials companies are been raising prices like crazy. Half of them have really high margins the other half have had their costs go up faster than they've been able to raise price so I know it's been a struggle for them but we're not seeing more capacity come into the system so I'll shut up right there and let you disagree with me. No, I think it's interesting. I have like two thoughts and I'm gonna try to break up these into two separate questions but you said a minute ago that a lot of these builders, even manufacturers they've had a really good two years, right? Like we saw 5% plus for the last seven quarters, right? 4 to 5% yes. That's what you expect in a year you hope for a 5% increase in a given year and we saw a quarter of a quarter. My big question is when I hear that I'm like okay well what are these manufacturers, these builders doing now? Because they're flush with, I mean a lot of them are flush with cash. Are they planning for this resurgence post, let's say this oncoming recession if there is one? What are they doing strategically? And the reason I'm asking is because I wanna give insight to the manufacturers that are asking that same question what should I be doing now if there's a little bit of a downturn? So the answers are publicly available for the most part. So 40% of the home builders now are publicly traded and they all do, all but one or two do earnings calls and they share the answer to that question on their earnings call. So you just gotta listen to all their earnings calls and summarize them. Well that's why we have you here. The two big, yeah so that's what we do for our subscribers. That's what we do for our subscribers in the apartments and single family rental and building products and the whole thing. It's one of the things we do. The biggest behemoth, D.L. Horton said, I mean their balance sheet is a fortress. They've already slowed down their starts dramatically. So there you go, building materials, the largest builder in the country who does 11% to say we're slowing down our starts dramatically but we ain't stopping. We bought a lot of land. We've got a great balance sheet. We're gonna keep going. The way I would summarize it was we were selling three homes per community per month and we're gonna go to two, which is more of a normal number. At the same time we're gonna open up more communities because we already bought the land and that's what we do. Lenar had an even more bullish statement on that is we're gonna keep going. We've structured our land purchases to be able to renegotiate them or wiggle out of them with options and other things. So what they said publicly is we're gonna keep going. I still think their sales pace per community is gonna slow because it was really high and most of the public companies are in the exact same boat and the private companies are not overlevered either and they're all sitting on networks that were, I mean, they're all worth far more than they thought they'd ever be. I don't see them letting go of people. I do see them offering their companies for sale. So I think that 40% public company market share is probably gonna grow to 42 and 44 and 45 as they gobble up privates. You're gonna see consolidation happen? Yeah, we've seen about a deal a month for the last 14 months. So I think that's gonna continue. Okay, so talking about housing supply because the people that would maybe disagree with you in reference to a housing slump, I personally don't think there's gonna be a housing crash at all. I don't even like using those words because I just don't see it happening but the people that would argue really hard against that are looking at millennials. They're looking at the amount of money they made and they're looking at the housing availability in the United States. We have some of the lowest housing availability ever. Do you think that that's gonna impact housing sales or our industry at all? Or how are you viewing that particular stat that there's such a low amount of availability? I mean, all that's baked into our analysis. The demographic boom that they're talking about was the births between 89 and 94 really which they're all turning 30-ish right now. So there's about two million more people born in the 90s than in the 80s in America. So that's, it's like a 5% increase in demand. So yes, the under supply for the last two years was very real. Prior to that, we were still oversupplied frankly from the prior cycle. But when demand exceeds supply, prices adjust. And not all of those people can afford to buy a house right now. In fact, frankly, some of them can't even afford their rent increase. So yes, from a shelter standpoint, our view is we need a million seven more homes but they need to be priced cheaper and the rent needs to be cheaper for all of million seven of those people to move into those homes. And so that's the correction we're talking about. And just to quote Jay Powell, he said on his June 15th call, housing needs a reset. I know, I know what does that mean? Yeah. What does that mean? Yeah, he is resetting this industry. He basically means, you know, I used you as a tool to goose the economy when it needed to be goosing. And I'm using you as a tool to slow the economy to get inflation back in line. What do you think about that, Zach? Well, you're absolutely right. You're absolutely right about that. I mean, he is using it as a tool. I was joking with a buddy of mine recently telling him like, hey, none of us like inflation. Like I don't like paying $5, $6 for orange juice but we love inflation when it comes to our assets that we own, AKA our home, home value. It's like, I don't want to pay more of the grocery store but I'm totally okay with my home value going up like through the roof. And those things are connected. They are, you know, as you, I mean, as you just spoke about, I mean, he's using it as leverage, if you will, you know, pun intended to get the pricing index down. That's what he's trying to do. Right. And go into the recession thing. You know, we just had a technical recession in some people's view with negative GDP. Yeah, what do you think about that? What do you think about that? There's a lot of debate on like, is that, are we really in the recession based on definition? You're hearing other people say, no, we're not technically there. What's your perspective? So I'll personalize this a little bit. So the, I mean, GDP is total spending but think of it as personal spending. So if you just went through what we went through with all the assets, if you had assets went up tremendously in value and you got checks and your savings account in every quintile, the savings accounts and checking accounts are much bigger than they were in 2019. So most people are better off. If you just went through two quarters where your salary went up an average of 6% and your expenses went up eight. Okay, that sucks. But you know what? You started in such a great place, it really ain't that bad. And that's what just happened to the US economy is that our expenses went up more than our revenues. But just like those, those home builder balance sheets, we, I mean, we can handle that. We don't want to go on forever. It does stink. I don't like paying $5 a gallon for gas. But I've got the money to pay it, thank you. So, John, if you're talking to a manufacturer, I mean, I'm thinking about conversations we had at this time last year and the conversations were there's more demand than we can keep up with. Supply chain is the only reason that we're not just making money, hand over fist. It was literally time itself felt like the only restriction on the building materials industry. Your eye roll is appropriate. But that, I mean, that's how it felt. We knew that the other shoe was going to drop. That was also all conversations in the last Q2 or like Q3, Q4 were like, this is really good. It shouldn't be this good. It's not actually this good. Something else is going to happen and there's gonna be a correction and maybe that's partly what we're feeling here. But if you were a building materials manufacturer and a betting man, what would you tell them? Ramp up, ramp down, clamp down, hold tight. Change, don't change. Where would you come in? Yeah, well, we've got a lot of them in clients. So I have those conversations daily. We're telling them to pivot. So pivot to where the demand is. So DIY is a tough comp. Pro is doing better. We do think we're in a long-term repair and remodeling boom, but a recessionary period could be a hiccup along the way. That's what we're telling them to focus on. This single-family rental trend where they're building rental communities is different types of materials that people want. They're more durable and there's some surprising things that are going on. The stairways need to be wider because people are moving couches in and out more often and little things like that. You just, I mean, if you pay attention to this stuff, you can kill it. And the geography, I mean, Florida is going ballistic right now. I feel like South Florida is now South Manhattan. So there are certain geographies that if you focus there and the materials they want there and you're gonna outperform other places. And I live in one of those geographies that's not that way. California, frankly, if you can see it on the freeways here, the traffic is not like it used to be. People left. Happy accident. That's kind of a nice perk. Well, at least my traffic flows. Right, right. Traffic only, I guess. John, there's a lot of talk, at least from like people I follow and finance it in every downturn, there's huge money to be made. And you just mentioned something about pivoting. I'm curious to get your take on when you look at the building product sector, are there particular categories that you look at and you're like, man, those guys are gonna do really well. And I know I'm kind of, I'm baiting this question because I follow you on Twitter and you said something like decks and cabinets and a few other ones, but I want to hear what you have to say about that. There's a lot in that too. I think the majority of my clients have a fortress balance sheets. Now we do have maybe, I think it's 7% of our clients who are kind of the world that's funded by SoftBank. So that's a different world. But the rest of them are looking at this exactly which said, this is an opportunity. In fact, I'm glad distress is coming because there's gonna be more sellers and more opportunities. And look what's going on in the LBM space. I mean, there's so many people rolling up lumber and building materials and primarily from sellers who are like, you know what? This last two years, even though maybe it has been pretty profitable, have not been fun. And people are tired and willing to sell their business and there's a lot of opportunity there. And there's a lot of money sitting on the sidelines act to take advantage of the distress that has not come and may not come. Okay, can you talk a little bit more about that? Like you mentioned, there's money on the sideline. What do you think are some of the big plays that happen over the next two years? Well, the one that is stunning to me that hasn't already started playing out is where's the office and retail distress? I mean, we're not going back to full office employment. We can argue about how much work for home that is going to be, but it ain't gonna be what it used to be. Maybe there'll be more elbow room so maybe able to get leased up, but office buildings are not trading at a discount. You know, retail was already in a long-term structural shift to online. It got, that shift got supercharged for two years. How many, where are all the shopping centers that have empty inline space and you can see them? Where's the distressed opportunities there? But I had to go back and look at prior cycles. It really takes two or three or four years sometimes for that to play out. So I think that's where the opportunities are gonna be. And it'll impact residential because a lot of the money was focused on residential may pivot to other real estate sectors if there's great distress investments. I don't see a lot of distress coming in residential, particularly because the mortgages have just been pristine. I feel like John, I could talk to you for hours about this. I mean, like I have questions about like, hey, what do you think is gonna happen long-term with baby boomers moving out and all these different things? But what I'm really curious to get your take on as we wrap things up is, you shared what you think is gonna happen. You shared where you think money is gonna be deployed. I know you have a lot of manufacturers you talk to. What is the, you know, when you look at the last real big recession, you know, the GFC in 070809, how do you think this one plays out in comparison? If you think we have a recession? Well, we're forecasting one. I mean, we're just in a technical one. We're forecasting job losses next year as the most likely scenario, primarily because I'm, the bad stuff usually comes from Wall Street and some sort of crazy debt syndications. And we saw a lot of that, not necessarily in housing, but I saw enough of it in housing to know that there was an appetite for high yield debt. People are doing land banking, which is considered risky at 9% yields. They're doing it with retail dollars. We had a client who's been securitizing loans to flippers. You know, I had a client who admitted that, well, it's part of an insurance company portfolio, but we're lending against people's crypto balances. We're lending to hedge funds against their assets under management. A lot of that stuff is hidden. And I think that's why J-PAL announces things way before he does stuff, as he wants to see what blows. But the CEOs of JP Morgan, Goldman Sachs and Morgan Stanley have all made three of the most bearish comments about the economy next year, of anybody out there. In fact, they're more bearish than their own economists. That makes me think those guys know something that I don't. Well, do you not think that they're hanging out? Do you not think they're jaw-boning at all, like saying, oh, it's really bad to try to poke a little bingo, let's slow things down just by saying things versus doing them? Do you not think there's any of that? Well, there could be, but their credibility is at stake if they're doing that. They're also in the business of selling people on buying their shares. So usually the bias is to be more positive. I think they're telling us, I'm aware that things are gonna get bad and as the CEO of this company, I'm ready for it. And I think that's what they're telling us. But this all ties into one thing you mentioned about baby boomers. I mean, it was perfectly predictable we were gonna have a labor shortage and that is perfectly predictable going forward because the number of people are going to retire. And then eventually those people are gonna start passing away and provide more resale supply to the market than we've ever seen before. And that was the big ah-ha. Those were the two big ah-has we did in that long-term book we did called Big Shifts Ahead. So you can count on that. Yeah, that's my big thing as people were so concerned about supply. But if you zoom out the next 25 years as baby boomers move out of their homes, I mean, they own what? Over 50% of homes in America. I mean, you know the number. Something absurd. They move out. We might have way too much supply. Well, yeah, I wouldn't go that far but it provides more supply to the market than from the resale side that we've ever seen before. I mean, the oldest baby boomer is 76 this year. So they're heading into their 80s which will mean that we need less new home construction because of this other supply that's coming than we have in the past. I mean, that's not Armageddon. It just means we're not going back to 2 million units a year. I mean, our number is an average of, we need 15 and a half million housing units over the next 10 years or 1.55. And a lot of people just say, no, we need 1.8 because that's what we've averaged over the long-term. And those averages are looking backwards not looking forwards. That's good. And that's what I tell our building product to prepare for that level of volume which is, in fact, the big pivot is to repair and remodel away from new. It's really good. John, this has been excellent. If our listeners want to follow you, they want to connect, they want to work with you. What's the best way for them to do that? Well, our marketing is free content. So we have an email newsletter every Friday. We post quite a bit on LinkedIn or head of research profile out on Twitter. And then of course we can share with you what our research is to make you smarter. It's less than the cost of employees. So that's our pitch. It's 100 of us will figure it out and it costs you less than a person. I love that. John, thanks so much again for coming to this show and for our listeners. If you enjoyed this podcast, make sure you go to ventvio.com slash podcast to subscribe and get more. Until next time, I'm Zach Williams alongside my co-host, Beth Poptiglove. Thanks everybody.