Immigration's Massive Effect on the Housing Market (and Landlords)

The real estate market has been a challenge for a while. We talk about this all the time on the show. You probably hear a lot about supply and interest rates being high, but today we're bringing out a new but really important data set into the mix of your understanding of what's happening in the broader housing market. It's immigration and how the influx of new people coming into the country is impacting the housing market. And of course, we're still going to talk about interest rates and supply and all that as we start to look forward to 2025. But I think the new data that we're going to bring into this conversation is going to shed new light and provide new insights into the housing market as we start looking forward to 2025. Hey, everyone, it's Dave. Welcome to On The Market. Today, I am joined by John Burns, who runs a company called John Burns Research and Consulting. They are specifically focused on gathering and analyzing real estate data. And he's even brought on a bonus guest, Eric Finnegan, who is the vice president of demographics for the firm. And we're going to get into some new data and research that they're doing that, honestly, I haven't seen anywhere else and I think is going to really help us all understand what we can expect in the years to come. We're going to be talking about household formation, which, if you don't know, is sort of like population growth, but is actually a bit more important for the housing market than population growth. We'll, of course, talk about interest rates and the implications of Fed decisions into 2025. And we're even going to talk about a overlooked factor in today's housing market, helicopter parents. Let's bring on John and Eric. John Burns, welcome back to the podcast. Thanks for being here. Happy to be here, Dave. I'm excited because your clientele is still buying a lot of houses and mine is slowed down. OK, well, this will be a good overlap then. And Eric Finnegan, thanks for joining us for your first ever appearance here on the market. Yeah, thanks. Looking forward to it. Awesome. Well, John, I'd love to just start at the top because you and your team do a very impressive amount of research across the whole real estate investing industry. So what are some of the trends in the market that are standing out to you right now? The big trend is demographics and immigration and that's why I asked Eric to join me because he knows it better than I do. We saw, including this year, I think we're going to have three of the largest immigrant years ever going back to Ellis Island. Wow. I know a lot of your clientele and a lot of our clientele buys homes and rents them out. Eric did some great analysis on this. We basically, over a three-year period, we think got 700,000 more household formations than we normally would and 600,000 of them were renters. So that's been a big change in the market. It's caused a lot of people who felt the multifamily market was going to go through a three-year downturn, the single-family rental market, some of the same, to get way more optimistic because they can see the bottom here. Wow. And just for clarification purposes, are we talking about legal migration? So it's both. Where we've seen it actually is in administrative records through the Border Protection Patrol Agency where their people are crossing the border. They're actually waiting to get picked up and processed into the system. They claim asylum and that basically gives them a right to be in the country for a couple of years until they're seen by a court judge, an immigrant court judge. And so just logistically, does that mean most of these folks are centered around border states, Texas, Arizona, is that where most of this household formation is concentrated? That's a big part of it, but they're also, they're ending up all over the country. They're ending up in Colorado and Denver, in Chicago, in the tri-state area, in the Northeast. It's really all over. Wherever you're coming from, if there's an established community like there is in downtown Denver for people from Venezuela, they steer you to downtown Denver. And there's a lot in Iowa. And it's actually done because like, look, you probably got relatives, there are people you know, there are people that speak the same language as you, there are people that can tell you what the laws are in America, and you can get settled a hell of a lot faster. It's actually, I think, pretty wise versus letting everybody just kind of hang out along the border. Yeah, where there's probably no like economic opportunity or enough services because it's too hyper-concentrated in those states. And it's obviously not fair for like certain areas of the country to take on the entire burden of all those folks. Right. But this is also why you do hear every corner of the country talking about this, because they're all seeing it in their neighborhoods. Can I maybe just back up a little bit and then define what household formation is in the first place? Because it's a little bit different than population growth, and I would argue more important for real estate investors. Way more important. In fact, I would even stop looking at population growth. What I would look at is job growth. Because you're trying to rent or sell a home to somebody who's got, they need a job, right? And then a household formation means that some people are, you know, they're not staying with friends, they're not staying with parents, they went out on their own, and somebody is having a household. So that's kind of a wonky term, that data is harder to get. And these immigrants, usually it's 4.4 people per household, because they tend to be a little more crowded, or some are just staying with friends. This last cohort's been 5.4 people per household. So really, the household formation could have been higher. Yeah, absolutely. And just to clarify, household formation is just a very good measurement of demand in a given market. Just as an example, say you had two roommates living together after college, and they ultimately decide they're trying to go their own way, and they both want to go rent a single family apartment. That creates an additional household without growing population. But now there's more demand for housing units in that area. And so that's why I think John is saying it's more important than population growth, because as an investor, anyone who cares about the market, this is going to be the real measurement of what level of housing is needed in the United States. So people are coming in, they're moving to different cities, and a lot of them are moving to in with existing folks, it sounds like. But are we seeing increases in overall demand for housing in a lot of these sort of epicenters of where migrants are winding up? Oh, yeah. No, and what we've seen at the same time, and this is what I was talking about in intro on multifamily, is we've seen a surge of construction of apartments. They're like, who's going to fill these things up? And it's the immigrants, and there's still the other migration we're seeing around the country out of the expensive markets into the more affordable markets. And that's not just crossing state borders. That's even now with this work for Momentran, just go into the next city, you know, five miles down the freeway, because you only got to come in to work three days a week. That's become the affordability solution for a lot of people. This is total naivete on my part. But are people with this immigration status, or they're waiting to be seen by court? Are they allowed to rent apartments to work? What's their day to day like? So once they are in the court system, they have to wait a little bit of time, but they can file for something called just a work permit, essentially, which lets them apply and work in jobs legally. It gives them a social security card. So they then pay taxes on that job and the income that they're earning. They can rent apartments at that point as well. And up until last year, the waiting period was five months, and it's actually, it's gone down to 30 days now. So within 30 days of someone being processed into the system, they can apply for that work permit and then start working legally, pay taxes, rent apartments, almost behave in the housing market like a full-time resident. And do those figures get counted in labor data? Yeah. If I hired one of those people, I mean, they survey me as an employer, and if I picked one of them up, they're on my payroll, they would count. The other survey is they call people at their house and say, are you working? And there's a percentage of that. So theoretically, that's the case, whether those people's phone numbers are actually in the system is a better question. Okay, cool. So what do you think the big takeaways here are for the housing market, given this really large amount of immigrants coming into the country? Well, the big takeaway is people that rent homes, which I know is your clientele and landlords, got bailed out. And I know politically that's a hot button, but from a housing demand standpoint, this 50-year high in supply that came to market got filled up. So we are going through what are called a multifamily valuation correction because of rising interest rates and because expenses in some area have been rising faster than rents, which is not good with insurance costs going up. But if you had a lot more vacant units in your apartment or you couldn't rent your house, you'd be dropping rents even more. And that's the big takeaway is that you haven't had to go through that in most areas of the country. That's so interesting. And yeah, just to provide some context, people who listen to this show probably know this, talked about it a lot, but we are experiencing a massive glut of multifamily supply coming online for the last year or so. And it's projected, I think, to extend at least into the first half of 2025. And so there has been some downward pressure on rents because of that. There's just not enough people moving on a monthly basis to absorb all of these units. But obviously, when you have hundreds of thousands of new households and individuals entering in the market, it can help soften that blow and reduce vacancy rates, particularly it sounds like in these couple of markets where people are mostly headache. Exactly. And is this happening in urban areas, suburban areas, or just sort of universally with cross markets? The urban areas still look to me like they're pretty empty. It's crazy. Yeah, it is crazy. One hobby of mine is I've been to all the Major League Baseball parks. So I went to six new parks this year in Pittsburgh and St. Louis and the ones I hadn't been to since they'd been built. I like to say every one of those downtowns was a ghost town. Really? Okay, John, what's the coolest baseball park? Oh, I'm 100% biased. It's San Francisco's. San Francisco! You can go to the upper deck and see the entire bay. I mean, they can hit a baseball into the bay. That is very fun. Probably the best thing about going to all those parks is getting the local food experience, and there's a lot of great San Francisco restaurants in the ballpark. So they're the best by far. Okay. All right. I'm going to have to take you up on that. I am a baseball fan, maybe one of three in my generation, but I do love baseball, so I'll have to check that out. All right. We have to take a quick break, but we'll be right back with more research from John and Eric. Welcome back to On The Market. I'm here with John Burns and Eric Finnegan. I know you all do a ton of research in your work, but does this change any forecasts you have for rent growth or vacancy going into 2025? Massively. So we had a very, very bearish view. We still have the most bearish forecast that I've seen on how much multifamily construction we're going to see this year and next year, but we were more bearish 18 months ago. So we thought it was going to fall from the 500s down into the high 200,000s per year, and now we're around 340,000 because we also survey a huge number of apartment developers and their lenders and equity providers who basically said like, we're out. We're not funding anything. And now they're telling us we're starting to go back. So that's why we're more optimistic that this is all going to stabilize more quickly. Eric, what are your takes on that? Because I imagine that a lot of the new supply is A-class kind of neighborhoods. Does that fit the types of households that are going to be looking for apartments in the coming year? So the immigrants coming into the country are not going to be renting class A urban apartments, but they are adding to the renter household demand. So the people that were, say, maybe in class C properties, they might be moving up into more class B and class B up into class A. So it's not a direct demand where someone coming across the border is going to end up in a brand new apartment with sky-high market rents, but they are keeping the occupancy rate for the whole market very high. Nationally, it hasn't dipped below the mid-90s, which when you think of a 50-year high in new supply, that's pretty surprising. And newer construction that you're talking about coming online, are we talking about urban downtown areas or some suburban areas which have been growing so quickly? There were about eight to 10 markets where everybody wanted to build apartments. Austin was one, Nashville or another. Those are the most oversupplied markets. I'm not seeing the construction come there. They're coming more into the suburbs. I do think this work-from-home trend has created more demand out where things are more affordable. The other thing that we're seeing, and we've been a huge beneficiary of this, we're super lucky, is this new build-to-rent trend, as people call it, which is building rental homes. A lot of them actually look like casitas, and some of them are attached, but they're single-story. And that's even becoming a mixed-use component of a big apartment complex where somebody would have done 300 garden apartments. Now they're going to do 250 garden apartments. And maybe, because it's lower density, 35 of these lower-density casita-type units, which are super popular. Okay. Very cool. And I know you look into this a lot, but it sounds like sentiment among homebuilders is starting to increase right now. What is that based off of? So there's some data out there that's very misleading. So the National Association of Homebuilders has a housing market index, and it doesn't look that great. So people are saying, yeah, the homebuilders aren't doing that well. It's a survey of people that mostly build three homes a year. So it's kind of a small builder survey, which there's lots of those. The publicly traded homebuilders, and I'm going to put into this the subsidiaries of some publicly traded companies, like a bunch of Japanese companies and Berkshire Hathaway, are now 58% of all the new home construction in the market. 15 years ago, they were 24. Their balance sheets have never been stronger. Their margins are phenomenal. They've changed the way they do business, where they're actually paying somebody to hold the land for them and take the risk. And they're using that so they're able to grow and invest their capital in growing their business and buying back shares. And if you look at what's happened to the publicly traded homebuilders this cycle, you wish you would have loaded up on the stocks years ago because they've all absolutely killed it, which is absolutely counterintuitive of what you would have thought when mortgage rates go up. Well, let's turn to it, to mortgage rates and interest rates. It is inevitable in today's day and age that we have to talk about it. And we are, just for reference, recording this towards the end of September, about a week after we heard about the 50 basis point cut from the Fed. John, what do you make of it? What was your instant reaction to the news? I mean, I wasn't surprised at all. I mean, Jay Powell has become a complete telegrapher of everything he's going to do because he knows the market won't freak out when you do that. The mortgage rates have these short-term rate declines built into them. And so mortgage rates really didn't come down very much when he did that because they already had that expectation in them because they trade more like 10-year security. So they look at inflation and they look at what the Fed funds rate is most likely to be over the next 10 years and get a premium over that. Rates have come from 7 down to 6. The market is indicating it should go into the low 5s over the next two years, even if the Fed drops a lot more than that. I mean, I'll just give you my take. I think that sort of consensus view seems pretty logical to me. Do you agree? 90%. Yep. And what do you make of the short-term implications of these rate cuts on the housing market? Let's just start with for the remainder, you know, last quarter of 2024 here. Do you think it's going to change anything? Well, I do think it's going to make housing more affordable for people who've been renting and wanting to buy something. So I think you're going to see more entry-level buyers come into the market. It's actually a big change for the rental industry because most people borrow at an adjustable rate mortgage in the rental industry, which really is bad finance. You shouldn't be buying a long-term asset and financing it with short-term interest rates, but they do. So that's why there's been a lot of stress in the multifamily market. And, you know, the word has been for a lot of these guys just got to stay alive till 2025 and hope rates come back down so I don't have to give my apartment keys back to the lender. You know, the more the Fed drops rates, the fewer people are going to have to give the apartment back to the lender. Right. Actually, for most of July and August, when rates were starting to drop, I was kind of surprised to see purchase rate, mortgage purchase application data sort of decline. But in the last week or so, it started to shoot back up. So I'm curious, do you think that this could unlock a little bit of transaction volume in the residential side of things? It's definitely unlocking some volume. And there's a lot of people that have been sitting in their house going, God, we've got a low interest rate mortgage, we're not going to move. But if you really hate your house or you really want to move, it's less of a painful decision to go get a 6% mortgage rate somewhere than it was a 7%. And we've seen people do that. But I think 76% of people have a mortgage below 5%. That number was 81% a year ago. So we're gradually seeing more and more people saying, you know what, we're just going to move anyway. Yeah. Eric, from a demographic standpoint, is there a backlog of demand of people waiting to jump into the housing market when prices become affordable to them? I think there's a case to be made there. Yeah. So two data points I can point to here, one, the Fed runs a monthly survey, the New York Fed runs a monthly survey, asking households, do you think you'll move in the next 12 months? And for years, it's just been a pretty steady decline down. And at the end of last year was the lowest point, I think, in the survey's history. Since January, that number has shot up from something like 13% up to 18%. So as a percentage point, it's hard to maybe think about that, but that's one of the sharpest increases in that survey's history. To me, it tells me that households are sort of itching to move and waiting, and they really want to move. They've been stuck or locked into their low mortgage rates, or if they're renters, there hasn't been enough supply to actually go look for a new rental unit. And I think we're not in the peak buying and selling season for homes right now. So even though mortgage rates have fallen quite a bit, the people that have choices and can wait and they want to wait, I think we'll start to see that movement more toward the spring. All right, cool. Well, that's, I think, encouraging for all of our audience who is anxiously waiting for the housing market to unlock a little bit. Curious, both of your takes on what this all means for pricing, because rates coming down, hopefully will increase some transaction volume. But do you think we're going to see a re-ignition of appreciation rates? Because at least on social media, everyone seems to be predicting that when rates come down, prices are going to shoot back up. But I think, at least my opinion, that sort of ignores the whole supply side of the question. So I'm curious, John, what your thoughts are there? There's definitely upside potential to price appreciation. So when somebody's selling their house because it was locked in, and then they go buy another one, that's kind of one seller, one buyer. That doesn't really change the demand supply equation. What changes the demand supply equation is when somebody's renting comes in and buys something, that increases demand. And if you're not increasing supply by an equal amount, which that usually has to come from a home builder, because that's a seller who's not a buyer, I think you're going to see supply from the home builders be very flat to up a little bit, because there's been so little investment in land development, that's the ultimate constraint for them. And so I do think there is some potential if a lot of first-time buyers come into the market, that we could see some strong home price appreciation. All right. Very eager to see how that plays out. But I think the logic and the economics definitely make sense there. One thing I need to throw out, I mean, homes are way more expensive in relation to income than usual. Even payments are. So you do have this dark cloud of crazy affordability hanging over all of this. But we've had that now for a couple of years. So we kind of know what that's like. And the other thing I'll mention for you is, guess what percentage of first-time buyers are getting help from their family? Oh, I read about this. Is it like 30, 40%? It's 40%. Oh, wow. Yeah, that's a lot. Well, and if you think about it, if you look at older people over the age of 55, there's about an 80% home ownership rate. A lot of equity too. Yeah. So every single one of those 80% just made a couple hundred grand on their house. And these tend to be the helicopter parents. I'm guilty of that too, who tend to want their kids to be around. And they're saying, look, I'm going to use some of that equity. I'm going to help you with your down payment or even your mortgage payment, just because I don't want you moving across the country. And so let's be inquisitive of that. Okay. Time for one last quick break, but stick around because I'm going to ask some selfish questions of John, because I think he has some insights that could help me in my own investing. And if you don't have a helicopter parent helping you buy a house, or even if you do, BiggerPockets has your back. Head to BiggerPockets.com for tools and resources to give you an investing edge. Hey, investors, welcome back to the show. John, lots of questions here, completely selfish. If you listen to the show, you know that I am typically a lazy investor. I don't flip houses, but I am getting increasingly interested in it. I just find it kind of fun, and it might be interesting. You guys released a survey about what's going on in the state of home flipping. Can you give us a summary, John, of what's happening with that side of the industry? I think partially due to BiggerPockets, we've seen a surge in over the last 10 years. It's our fault. I'm sure there's a couple from Waco that's involved too, and there's other people that are involved. It's kind of a quick buck. And there's a lot of people that have not seen a downturn before, and so they had a tailwind while they were doing this, and they've made a lot of money. And there are a lot of homes that are in need of a lot of repair. So I think it's a good business. It does cause an affordability problem because it takes a home that's 250 grand off the market from somebody who might afford it and puts a 450 grand home back. Yeah, that's right. So we do a fix and flip survey, and so financing has become available to these groups. They're actually securitizing those loans now, by the way. Nine-month-long mortgages, they've figured out how to securitize them. Like hard money loans? Absolutely, yep. And they're only nine months of maturity too, yeah. Tourette Capital has been a leader in that. Man, the financial system will find a way to bundle and sell anything. Yes, they will. So those guys make the loans, and then they're not even on the hook if something goes bad in the first place. So to answer your question, the flippers have not been getting a lot of tailwind price appreciation the last 12 to 18 months, so their returns have come down. The costs of the remodel have gone up dramatically. It's 40% construction costs, 40% since 2019. So that's been a struggle. But our surveys are showing that everybody's doing fine. Very few people are kind of losing money, but the crazy heyday of remodeling a home and getting a bunch of price appreciation while I was remodeling it and not having to pay a hell of a lot more for the remodel seemed to be over. Yeah, it's interesting. I've heard more people, even who aren't investors, who wouldn't call themselves investors, I would say, considering a flip or buying a home that needs significant renovations and doing the work themselves just because of the affordability problem. And hopefully you can build some equity for yourself, but it also just might be an easier way for you to afford the type and style of home that you are dreaming of. So one question for you, and this is Census Bureau data, we're seeing the numbers of single-family rental homes in the country decline. I mean, they spiked during the great financial crisis, and then they've been down. So are you seeing a lot of people who bought homes finally saying, you know what, insurance costs are going up, and I'm just gonna sell the house and pay the capital gains? Because that seems to me that's what's showing up in the data, but I don't hang out with that world. I would love to see that data because I don't know. I'm curious because this is just gut instinct. My instinct is that we have more people who are trying to be a landlord rental property owner deliberately, where we have growing audience and bigger pockets. These people, although some of them flip, primarily are looking for long-term rentals to move up their retirement date, offer some additional income. Perhaps what we would call the quote-unquote accidental landlords are choosing just to sell. I think there was times where it was more appealing where if you inherited a home or you moved, it was like, hey, maybe I'll hold on to this property and rent it out. But with the way the finances work right now, it's not always going to cash flow, and maybe people are just choosing to put those back on the market, but that's a total gut instinct response to your question. Well, I just looked. We grew at about 15.5 million rental homes at the peak. We're down to about 14.2 million. Interesting. That's a big drop. Yeah. But when the Great Financial Crisis hired, we were more like 12. So we went from 12 to 15.5. Now we're back to 14.2. Interesting. Well, it's hard to say what's better, right? Because as long as they're occupied, that's the good thing. But hopefully it's first-time homebuyers or people who need those homes, buying them instead of renting them. But it does make you curious about rent prices. And it's also supply hitting the market. So going back to your home price appreciation, boy, if 2 million investors decided to sell their rental homes, that would create a soft home pricing situation. Oh, yeah. So I don't know if you know this, John, but I am American. I'm in the States right now, but I live full-time in Amsterdam. And they sort of famously, about two years ago, enacted a rent control law where they were capping rents. And it has helped soften the housing market because all the rental property owners are selling their properties. But rents are skyrocketing because the supply of rents have just gone down. And it's not actually helping. It's helping some people afford homes, but it's not actually helping the people the law was designed to help because rents have just absolutely gone through the roof. So I wonder if something like that is also going to be happening here. Nobody's going to build any more apartments if that's the law. Exactly. That'll cause demand supply to get out of balance. All right. Well, thank you both so much for being here, Eric and John. Is there anything else, any other trends you think our audience should know about before we get out of here? Those are the big ones, but we're surveying flippers, we're surveying landlords. If any of your folks want to be involved in that, please just email me. It's just jburns at jbrec.com. We'll make sure you get on the list and then you'll see the results too. Well, thanks again. We will absolutely put a link to John's contact information and all the research they do over there at John Burns Research and Consulting. And thank you all so much for listening to this episode of On The Market. We'll see you soon for another episode in just a few days.