Epcon Experts Series With Ali Wolf: The State of the Economy

Ali Wolf, Chief Economist at Zonda

 

Ali Wolf, chief economist at Zonda, discusses the state of the economy, the housing market, buyer demographics and more in this episode of the Epcon Experts Podcast.

“There’s a lot of value in knowing and sticking to your bread and butter, what you’re good at, but also figuring out what kind of diversity you can add to your company without pulling from your core strengths.”

Host: Today, we welcome Ali Wolf, chief economist at Zonda. Ali, thank you so much for joining us.

Ali Wolf, Chief Economist at Zonda: Thanks for having me.

Host: I’m sure you get asked quite a bit about what you see happening in the economy, particularly in housing, obviously, in your role. Rather than starting the conversation with your predictions about the future, what are some of the positive signs that you see right now for housing in general?

Ali: I imagine, Paul, you’re going to make me answer the question about what I’m projecting in the future a little bit later in this podcast. I know I’m not off the hook on that.

From a positive point of view, there have been some turns in the market recently that are noteworthy. One of the important things that we’ve been tracking is what’s happened on the equity markets when we look at the stock market. For certain buyers, that’s a really important driver of wealth.

As we know, this year, there’s been a lot of volatility. When I was doing presentations almost a month ago, we were saying equity markets were down 30 percent compared to where they were at the beginning of the year. Now we’re talking down 10 percent.

That’s a really notable shift happening at the same time that we’re seeing gas prices have come back down a bit. We’ve seen mortgage rates come back down a bit.

Host: Those are good signs. We’ll talk a little bit more about the buyers that we typically serve. Certainly, the equity market is a big driver of what we do. A lot of our buyers are cash or just do small mortgages. Those certainly are really good positives out there. What are some of the potential bumps in the road that you’re monitoring that might impact some of those positives that you see right now?

Ali: What’s interesting about today’s market is if we recorded this two weeks ago, maybe we would have a slightly different take on the market. If we record this two weeks in the future, we may have a slightly different take on the market just because there is so much volatility and so many moving parts.

That’s one of the risks, which is I’ve been doing presentations for years. Oftentimes, I could use the same deck for a couple of months and not make many changes. Now, I feel like I’m scrambling to update and to get some of the most up‑to‑date information. There are a lot of things that are changing that impact consumers. We know how impactful consumer confidence is.

We’re tracking just the general economic and housing uncertainty from a consumer lens. We obviously can’t be talking here in 2022 without talking about inflation. We still have inflation that’s at over eight percent compared to where we were last year when a normal economy should have two percent inflation. We’re clearly in an overheated economy, and that’s obviously causing the Federal Reserve to be aggressive with their policy.

We have uncertainty and a lot of moving parts. We have consumers that are responding. We have data that shows the economy needs to slow, and we have the Federal Reserve trying to figure out how do you do that without pushing the economy into a recession.

Host: You’ve made a comment before that the consumer has a certain percentage of economic activity. What is that, and how’s that trending right now?

Ali: Consumers represents 70 percent of the overall US economy. I know, Paul, you ask a direct question, but there’s a lot of different ways to answer it, which is, if you look at our industry, consumers are extremely strong. The people that are buying homes have really good fundamentals. They have good credit scores. They have skin in the game, which is something we didn’t have as much of last cycle.

When you look at the broader landscape, so coming outside of our industry, we have savings from consumers that are starting to get depleted. Remember, we saved a lot of money during the pandemic for a lot of obvious reason.

Then, we’ve been spending that money. The good news is we’re not spending the money by going as much into debt as what we’ve seen in the last cycle, but we’re seeing a little bit of an increase in overall consumer debt balances and retail sales, which is a good measure of consumer spending is shifting down. Consumers are still healthy that we are seeing some shifts on the ground.

Host: You’re right. I’m going to ask you some really tough questions about your predictions. First, I do want to give you an opportunity to talk a little bit about Zonda.

We, at Epcon Communities, do use Zonda services, and love it. What are some of your favorite things that Zonda does and how does that help builders across the country?

Ali: Zonda, just high level. We’re a housing data and consultancy firm. We track the entire building lifecycle from raw land all the way up to the closing out of new home communities.

Zonda came about because there was a company called Meyers Research, and there’s a company called Metrostudy, and both of them had their own unique datasets. We realized we were stronger together, so we went through a merger.

What I find really exciting about our platform is that we do track land and lots under development down to the zip code level, down to the plot level. We use satellite imagery to track what stages of development different lots are in. We can track if the cycle time has gotten stretched out, as we know it has. We can start to catch the early change when maybe it seems like we’re able to build homes quicker.

We track which communities are the best‑selling, what price points are the best‑selling, what square footage is the best‑selling. We supplement all of that with real‑time insights from a division president survey that we do.

That asks some of the qualitative questions, like how does the market feel to you? We can talk about total sales, but what does that feel like relative to maybe what a builder was expecting? To me, I think our data is the foundation of our company, and it’s the most exciting.

We also have an advisory team that does custom market studies. We have a media team. We have technologists. We’re really trying to push the industry forward with a lot of our technology and our data.

Host: It’s really powerful information. I’ve been using Zonda reports for several years, but had the pleasure of attending the Builder 100 conference, and saw just a whole new level of abilities that are out there.

The marriage of AI and satellite imagery. How you’re able to track communities really before anybody knows about them, other than the specific builder that’s doing it, because you’re spying on everybody. It’s just amazing. I know a lot of our builders are using a lot of that information in their businesses.

Now, I am going to ask you to get that crystal ball out. What is your long‑term view of some of the opportunities available in housing over the next 5 or 10 years?

Ali: Let’s start with our near‑term forecast, and then I’ll go into some of the longer‑term views. As we are going through the forecasting process, we have to come up with a thesis of how we think the market will evolve. Our thesis right now is that we’ve already seen the housing market slow. We’ve seen some builders respond to that by pulling back starts.

Our belief is we see the most notable drop in starts this year. See starts level remain about the same level into next year. Then we see a ramp up coming back into 2024. We could be wrong. There’s a lot of things that could change. We talked about how the data is moving on a constant basis.

Our general thesis is the idea that there’s still a lot of people that want to own homes. We have clearly run into some affordability and confidence issues. We still have an under supply of homes in certain locations, at certain price points available. We can eventually get back to a place that I think those are better in line, but it’s going to take some time.

With that being said, when we’re trying to look longer‑term, the most challenging parts of our industry to make sense of is the fact that once you build on land, it’s gone. The land is a finite resource. There are certain parts of the country, notably, the West Coast or the East Coast, where they’re landlocked markets, there’s been a lot of development.

If you look at their total level of permits or starts, they’re so much below what they were, not even just last cycle, just 10 years ago, 15 years ago, 20 years ago, because the land there is no longer available. We still have homebuilding businesses in those markets, of course.

As we look longer term, we look to some of those secondary and tertiary markets that do have relatively more developable land, maybe relatively easier regulation than you would find in some of the coastal markets, and a new acceptance of employers going to different areas to try to attract diverse talent, given some of the hybrid work and the work‑from‑home trends.

For us, we see a lot of opportunities in some of the lower‑cost markets that have a stronger job base with them.

Host: I was looking at that top 10 list. When you show it in your presentations, it typically has several years of history to it. A lot in the ordering will change, but it’s a lot of the same cities and markets year after year.

Let’s talk about some of those secondary markets as maybe some of the perennial markets start to get built out or become less attractive for other reasons. Where do you see opportunities in secondary and tertiary markets right now?

Ali: Paul, as you and I talked about this question beforehand, and as I was putting together the list, I did not put it together with Epcon in mind. Though I know some of the markets I’m going to say, it does overlap with your footprint. You guys have made some smart choices in looking at maybe some of the more under the radar markets.

To reiterate the chart that you’re talking about, we pulled together the markets that have the most housing starts. It’s usually Dallas, Houston, Atlanta, Phoenix, Austin. It’s a lot of the same markets.

If you go further down the list, the Carolinas is not really off the radar anymore. Most people know the Carolinas has potential in job growth, lifestyle, and desirability, but I would still want to acknowledge Raleigh and Charlotte for the strength that they have.

Indianapolis. I really like Indianapolis as a growth market. As a market that offers a lot of lifestyle with also affordability, with also the Midwest mentality. I’d be remiss to not say Columbus, Ohio.

Host: Of course.

Ali: Of course. A graduate of the Ohio State University, but also, a big fan of the market. For the level of growth that it’s seen, for the variety of, again, things to do, it ticks a lot of boxes. Then the other two, I’ll say, one is San Antonio, which has grown so much so fast.

I’m watching how San Antonio plays out over the next couple of years. It maybe got a little bit too ahead of its skis, but it’s a market that’s good for long‑term durability. Tim Sullivan, from my group, loves Huntsville, Alabama. I’ll say Huntsville, too.

Host: That’s an interesting one. I’ve been there. That is a good market as well. We do see that. A lot of the perennial markets, they’re still overly competitive and difficult to break into. We do see our builders finding great success at these second cities or third city. Thank you for your thoughts.

What are some of the buyer demographics within housing that you expect to have the most resilient or even the strongest demand in the coming years?

Ali: This is a complicated question, more so than it sounds. There are a lot of different ways that you can look at it. From a sheer volume point of view, I’m sure you know exactly where I’m going. There’s a lot of enthusiasm around the Millennials, because they’re just the largest‑living generation.

They’re hitting the prime age to buy homes. So many Millennials have bought homes over the past five years, but they’re also move‑up shoppers. This group has become more varied than what it’s been in the past.

This is also the group that when you look at today’s affordability challenges, Millennials, absolutely, if they haven’t already purchased, want to purchase. Their ability to purchase has gone down notably over the past two years since the start of the pandemic because of the hotness in the market.

On the other side, we know that the Baby Boomers or the Gen Xers, they have very high homeownership rates. They’re first‑time homeowners, second‑time homeowners, third‑time homeowners, multiple homeowners.

I also think when you look at the groups, they have more wealth. They may have more equity baked into their home. They may be willing and able to tap that equity. They may be able to tap that equity. Yes, maybe they have to reset their interest rate, but they also have a lower mortgage amount because they were able to bring so much cash to the close.

As we look at it, each of the groups, from Millennials, even the next group, the Gen Z, Gen Z is going to have the biggest affordability issues. Millennials have been saving for a while. Those that haven’t purchased still want to. The Gen Xers and the boomers have the push and pull off the rate lock‑in effect, but also, wealth. It’s a complicated web that we’re trying to solve there.

What we see too is the interrelationship between the Millennials and the Boomers. Paul, you know about our baby chaser index. What our data shows is that 25 percent of Boomers want to move to relocate somewhere near their Millennial children because of the grandbabies.

We’re going to release, probably in the next week or two, our new baby chaser index, but all of the markets are in the southeast and southwest. You’re seeing the attraction to the Millennials and the attraction to Boomers. That overlap has fueled a lot of growth in those areas.

Host: In my experience, and you can correct me if you see something different, but most builders stick to one or two niches within homebuilding once they find something that works and suits their process as well.

Since you analyze all areas of housing now, I wanted to ask you, do you have any thoughts on how some of the different move‑up, custom, or entry‑level, how they ebb and flow differently in the same economic cycle?

Ali: Even strategies within an economic cycle shift. For example, what we saw during the pandemic, and I actually don’t know, Paul, if you guys did this, but so many builders shifted to a very heavy spec strategy, because they were trying to control their costs. They were trying to control the timing of when they release the home and understand pricing.

We know last cycle specs got us in trouble. There was a big shift to build to order. Then build to order was really popular until everything became out of whack. Then we saw more specs coming back into the market. Now, specs are just a little bit uncertain, given the changes in the market. We’re seeing a shift back to build to order.

There’s strategies even within these companies that are shifting. Another part would be builders that have the ability to do for rent. Some builders are saying, “We’re going full steam ahead on for sale.”

Some builders say, “Well, you know what, we’re going to add a for rent division, because we want a little bit of diversification. We want to try to capture the demand that comes from each of these different buyer types.”

We talked a lot about the Millennials and the entry‑level buyers. Over the past couple of years, a lot of the homes that were intended as entry‑level ended up being homes that went to move‑up buyers, because the inventory was so scant.

Now, what we’re seeing is move‑up is actually returning to what a traditional move‑up home is, and entry‑level’s looking more like entry‑level. It’s really fascinating to watch the strategy shift. The builders think about new ways to enter the market, be competitive in the market. Lots and lots of moving parts.

Host: Since several of those areas can move in different directions or with different velocity, if you were working at a builder directly ‑‑ and I’m sure every builder would love to have an economist on staff to keep tabs on all the leading indicators, and really dive into the data ‑‑ how would you advise somebody to diversify their business so they can weather any economic uncertainty or different conditions within the various segments of homebuilding?

Ali: I’m going to answer a different question before answering that direct question. One important thing that we’ve learned over the past couple of years is the difference between leading and lagging indicators.

Even if builders don’t have an economist on staff, I think understanding what are some of the key leading indicators of shifts in the market, both from within our industry, which of course would be cancellations, days on market, listings with price cuts, incentives, and also a lot of the indicators outside of our industry.

Looking at a change in industrial production. We talked earlier, Paul, about retail sales looking at changes in retail sales, knowing that job data is absolutely the last thing to turn. If you’re feeling really comfortable about your market, because job data is still there, I would also go back to some other leading indicators to just get a sense of jobs is lagging, what’s leading.

I know is a tangent, but I also think it’s really important because most people don’t have time to sit there and look at what has historically shifted ahead of different market changes.

To go back to your original question, there’s a lot of value in knowing and sticking to your bread and butter, what you’re good at, what your team is good at, what you have experienced, what you’ve hired around, but also figuring out what kind of diversity you can add to your company without pulling from your core strengths.

It’s very similar to investing where you want to be ‑‑ I don’t want to go into the when you retire all of those different questions ‑‑ but you want to be a little bit diversified but also a little bit safe. You also want to be nimble if the market feels like it’s changing, trying to figure out how you can adjust quickly.

It’s sticking to the core strengths, but figuring out what’s complementary to that and what could maybe offer a hedge as the market shifts.

Host: That makes sense. Not wanting to be all things to all people but also not wanting to have all your eggs in one basket. My takeaway is being deliberate and precise in what you do but diversifying along the way as well. Thank you for that tangent because you gave everybody six great economic shortcuts to look at for leading indicators in our markets.

Ali: I can’t help myself. I get really worked up about that.

Host: Let’s talk specifically about what we do. We’re Epcon Communities. We build homes and communities that are popular with the 55‑plus demographic across the US. What is your take on our market segment right now? How are things maybe a little different than some of the other segments?

Ali: Similar to some of the things we said earlier, when you look at the 55‑plus housing market, there are so many layers and follow‑up questions of, are we talking a move down but a higher price point 55‑plus? Are we targeting those on a fixed income?

We know that there are certain parts of the population that have found what’s happened with inflation very troublesome and very challenging. If we’re talking specifically in the new home market, I don’t know how many of those consumers actually convert to becoming for sale, new construction buyers.

From the sense that I’ve picked up, we have some experts in the Southeast and I’m not saying Southeast is where we see the only concentration of 55‑plus, but those are our experts at Zonda that really focus on 55‑plus trends. How was it shifting? How is it changing?

It seems that normal seasonality in particular, in some parts of the Southeast, is completely returned for 55‑plus. The market is slower, as you would imagine, during slower times of the year. There were a couple of years that we came from where that wasn’t the case.

A big thing in the market is seeing the return of some normalizing, but also, we started this discussion by talking about the shift in equity markets, the stock market, and how that’s actually come back for some. We know how important that is, I would say, yes for the money but also for consumer confidence. We also know that home equity is still massive.

For any of those that are 55‑plus buyers, that are either moving down within the same market, or more notably relocating from one market to another, those are the ones that I think even if we saw prices adjust down a little bit, they would still be flushed with wealth and in some cases cash to bring to the market.

Host: I would say that’s least, in my opinion, very much in contrast to the last cycle that we went through where a lot of the buyers were trapped in their current homes. We are seeing that a lot of times our buyers buy something that is smaller in terms of square footage, but either cost the same, or maybe even a little bit more because they’re interested in changing their lifestyle.

That difference between now and 15 years ago was really going to make a big impact on the next several years, at least for us in what we do.

Ali: Paul, as you look at your footprint and the homes that are within EPCON, how are you finding the current state of the market?

Host: It’s slowed a little bit over the summer, but that could be returned to seasonality, as you said. We do a lot of business in the Southeast. I remember when I was with a national builder in Florida, I had to retrain my brain because it was the opposite. Things slowed down in the summertime, and things picked up in the wintertime. It’s very much in contrast to my time in Ohio.

We are seeing things really start to tick back up on the right track. We’re actually seeing average sales prices increase a little bit. I think that speaks to what you said that as the equity markets have rebounded in the last several weeks, people are feeling more confident. If they need to make a change or want to make a change, they’re going to do it.

Ali: Makes sense.

Host: I’m going to ask you one final question for this segment. It’s going to tie to what we talked about as far as what Zonda does, I think, when you give your answer. What advice would you give to a builder who’s considering expanding into a new market? What do they need to do first to make that jump well?

Ali: You’re right. It does layer into well of what we do at Zonda. We have a team. They did expansion studies before the pandemic.

Basically, they’re just doing custom market studies on looking into expansion markets today because it’s become such an important question to try to solve of what ultimately should we be looking at, what fundamentals, whether it’s migration, job growth, competitors, pricing, what’s available with land and lot supply.

There are a lot of questions from a market dynamics point of view. I also think acknowledging that for the past two years, you could almost go anywhere and almost build anything, and it would sell.

I think as we look over the next 5 to 10 years, we need to get back to the basics, which is consumers don’t want homes. We’re still under‑supplied, but we also need to do the consumer research and really nail what people want and what they’re willing to pay for.

Paul, you were talking about, in some cases, square footage goes down. Price goes up. If those products are right size, it’s a really an efficient floor plan that works that caters to the buyer. I think there’s understanding the market and then understanding the local buyer, and those may become really important in this discussion.

Host: Good advice. It’s very important to know where you’re going with the underlying fundamentals and what’s going to sell well in your market.

Ali, I want to thank you for having this conversation with us. It’s always insightful to hear from you. We’re very much looking forward to seeing you in Nashville next year for our annual conference. I think that’ll be great. Thank you.

Ali: Awesome. Thank you.

To hear more from Ali Wolf, check out Q&A With Ali Wolf, Chief Economist at Zonda.