It was weird. It's like, all right, Connor, you know, here's your laptop, here's your nook where you're gonna be working conference room's over here. The economy explodes in 2030 there's cookies downstairs. And I was like, wait, what, what was that last one?
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(01:17): If you're a long time listener, then today's guest will be a familiar voice. Few young economists present their insights with the authority, accuracy, and humor that he brings to the stage. And yes, he's a millennial, but he brings a new perspective to the world of economics. Last year, he joined us to share his views on the economy. As it specifically relates to residential construction, it was a very popular episode. It continues to rank at the top of our weekly download list. And a lot has changed since he joined us back on episode 22. But in some ways I think things are pretty much the same. It's uh, my pleasure to welcome back con lo R from ITR economics today's show. Welcome Connor. Thank you so much. Happy to be back. It's been a little while, like you said, some things are the same. Some things are different, but uh, always happy to talk. Construction got a lot of, got a lot of clients there and, and do a lot of keynote to folks in the space. So it's, uh, looking forward to diving into it here today. So I'm gonna be flying solo this week. Dave is enjoying some downtime some time off. So have you been anything new and exciting in, in your life, whether personally, or with ITR, anything you wanna share with the listeners before we dive in?
(02:15): Yeah. So for our listeners, I can't remember if I mentioned it last year, but, um, you know, went through the, everyone's talking about backlogs and I'm, I dealt with the wedding backlog of my own in the last year, getting married two times one was COVID appropriate. The second one was the one that we were trying to do all along. So we, we kind of cleared the channel there, but now that happened to so many of my millennial friends where a lot of weddings got bumped. So I tell my manufacturers, you know, cause they're, they've got bigger backlogs than they've ever had their lead times their way out. And I was like, I've got a wedding backlog this year. I got nine weddings, five bachelor parties. My wife's got five bachelorette parties. I was like, I wanna talk about some real problems, you know, try to do all that in a year, non, you know, survive at the end of it. So Yeah, I mean, we all know the excitement that goes around. Well, the, about the excitement and the emotion that goes around planning or trying to get, get yourself, uh, married, we, we will say it a lot of times, sometimes the planning process for construction projects is actually very wedding planning. Like lots of resources that you have to bring together. So yeah, I can imagine you were, you were up some stuff and it's nice to get in your rear view mirror. So, but congratulations on that. Thank You.
(03:17): You know, ITR, I've been a big fan for a long time and you guys are all about forecasting. Uh, I wrote down a couple of bullet points, things that you had said last year when we talked, and you said that to some degree COVID would still be with us, I think check to a certain degree that that is true. You said the demand for new homes and remodeling would remain strong check. That that certainly is, is what we're seeing. And from everyone I talk to seems to be the case supply chain constraints would not go away anytime soon. Uh, you definitely nailed that one inflation would begin to rear it's ugly head we're we're seeing that definitely from a forecasting standpoint, you certainly spot on. I mean, is there anything that you would say that didn't happen the way you guys thought it would over the last year?
(04:01): I think the degree of inflation, we knew it was gonna get hot. It's gotten hotter than I think that we thought it would, at least from a, just a, a pure rate standpoint. I was kind of hoping, you know, when we get got this on our schedule, uh, a little while ago that we would be, things would become starting to get blissfully boring and normalizing. And that the hopes for that went up in flames pretty quickly. This year, obviously the, the rush Ukraine situation. Now, China reengaging in lockdowns, both of which are adding to the tail, uh, on inflation. So those are the two biggest things that hopefully the listeners won't won't hold against me for, for not seeing coming. But I think that that's, and again, I think hopefully expecting things to calm down a bit this year and, and obviously five months in we're we're not close to, to boring it's it's still quite, quite volatile. So, so that's, those have been the only surprises, but otherwise, you know, by the time we got to the middle of last year, the second half of the year played out pretty predictable, you know, within our forecast, you know, there wasn't any big curve balls there. Uh, it's really been, you know, the first quarter of this year, that first four months that a couple mini black Swan events out there that have kept our lives interesting. More interesting that I would care for it by the way. But, uh, interesting nonetheless.
(05:11): Yeah, I think the seeing fuel prices where they are has got everybody nervous and that just, you know, trickles down through everything, especially, you know, in our side, in the industry, the manufacturing, the transportation, just getting to the job site. Uh, it's certainly, uh, not, not something any of us wanna see. And I mean, do you see that coming down anytime soon? Or is this something that's probably here for a while or It's something that sticks with us this year? Uh, unfortunately for sure. We, so we basically, when, when the Russia Ukraine situation hit almost every commodity launched metals in particular fuel in particular, uh, you know, copper was stabilizing and then it went up, you know, almost 20% in about two weeks, the nickel market, you know, broke essentially it went up two, 300%. It was a, just a whole mess there. Steel scrap was finally softening in January, February, then it posted a massive increase in March. So basically basically what happened from our aggregate thinking, you know, in a perfect world where Russia didn't invade Ukraine there weren't interrupted energy flows were not interrupted metal supply chains. You know, we actually, would've seen inflation starting to cool off at this point, you know, pre Ukraine. We had it pegged at, at an end of the first quarter peak and then actually getting better.
(06:21): So as at the time we're recording now, you know, the light at the end of the tunnel should already been here. Right? Of course, when that event happened, it basically added another quarter to overall just general inflation pressure that we now think it accelerates, uh, through the balance of the second quarter and then peaks as we get into the third quarter and starts to come down. And for the listeners, a peaking inflation rate doesn't mean things start to get cheaper in the third quarter, just simply that the pace at which things are getting more expensive starts to come down. Uh, part of the reason for that tail is the energy cost issue. So, you know, copper went to like four 90, you know, per pound. Now it's back to, you know, 4 30, 4 40. So it kind of gave back everything that picked up during Ukraine. It's kind of back towards where it was.
(06:59): Steel is easing, lower energy is sticky. That's gonna stay expensive this year, which in, in the refining capacity, so tight. So it's, we're actually seeing even more inflation on the refined product side. So, you know, you're just on highway regular gas costs. I mean, the diesel market is H horrific right now. And we don't think that that goes away. In fact, we think, you know, oil, you know, from an American perspective, west, Texas intermediate, it's about 1 0 9 1 10 today. We think it'll actually go higher this summer. Unfortunately we think it probably gets close to one 20, uh, at its peak, cuz inventory levels are very tight, refining capacities maxed out. They're trying, but they're pretty maxed out and we're, you know, summer demand. I mean, it's, it's gonna go higher. So we think that the energy pain stays through the summer. It'll get better next year, but, but better, I don't mean like 2019 or, or middle of lockdown, like, oh, gas is $2 a gallon again, that that's not gonna happen. We, we think it'll, we think it'll get cheaper, but, but it's gonna be pretty uncomfortable here. And, and as you said, it's the rub with energy is you can't Dodge it. I mean, you know, nickel, for example, you know, some of my manufacturing clients, you know, they, they consume it. So they notice that right away. But you know, your general American probably has no idea that that nickel costs went up couple hundred percent essentially overnight in late February. Cuz like if you're not consuming it, you're not seeing it. You don't notice energy. You notice at the pump, folks are gonna notice that filling up their trucks, they're heavy equipment and indirectly, it, it affects your landed costs for everything by the time your groceries, you know, as you think about diesel costs for farmers, you think about, um, you know, natural gas costs, driving fertilizer inputs that are up anywhere, depending on, you know, what fertilizer component it is.
(08:33): It's up anywhere from one to 300% right now. So your cost at the grocery store are gonna accelerate higher this year and next cuz that's gonna be affecting this growing season yields this year grain costs for, for finished, uh, you know, foods next year, you know, your, your landed costs, you know, just moving lumber around Mo moving people, you know, folks to job sites. I mean, it just, it hits everything and that's why it's, it's painful right now. And it's, you know, obviously from, from a business perspective, you feel it that way, but you know, you take the work uniform off and you go home, you fill up your car and you pay your utility bills. I mean, you see it, you feel it. Uh, and it's gonna be taking dollars away from Americans that otherwise, you know, dollars that might have stayed in savings might have gone into the stock market, might have, you know, gone towards a home down payment or buying appliances or going out to eat or not. You know, there's gonna be kind of billions early of micro transactions happening or not happening, happening differently, substituting away behavioral changes. So, so that'll be it. We think it'll get a little bit worse before it gets better this year, you know, this summer and into the fall. Unfortunately
(09:33): I'm showing my age here, but I am a child of the 1970s, which, you know, a lot of things are kind of in a similar state. It seems it's like, I think that's probably the last time we saw inflation at, at this scale. And you had fuel embargoes and, and you saw a shift from companies, you know, the car manufacturers, making the big cars to the smaller car. Do you see it as that much of an impact to where we might start seeing a change in, I don't know whether it's the, the types of cars they're manufacturing move to electric vehicles. Do you think some of that's gonna get either pushed forward or to the forefront because of this? Uh, I do, uh, uh, and we do a hundred percent, so that's actually already happening. So when we look at say electric vehicles, you know, from a market share perspective, you know, if I look two years ago, for example, you know, we see that, you know, EVs as a market share, you know, March, April, 2020, it was about, it was under 2% total market share. If we look at total vehicle retail sales by units, just just number of cars, it was less than 2% were EVs fast forward a year, you know, April 20, 22. Uh, it was, you know, two and a half, 2.6% this year jumped to 4.7%. So that's an accelerating trend line that we're seeing there from an EV perspective and from a hybrid market share perspective. So, uh, you know, cuz folks it's, we were kind of in a golden age there for, for trucks and SUVs.
(10:49): I mean, when oil prices fell off in late 14 and 15, basically the 2015 through 2021 period, I mean it was trucks and SUVs, big cars, you know, granted their gas mileage was just gotten better, but still of course, relatively, you know, it's not a sedan, it's not a hybrid, it's not an EV. And so, so that's gonna continue to drive some behavioral change from a, a consumption perspective, uh, you know, for, so for like north American auto auto producers and particularly us auto producers, they don't love that cuz cuz they can produce trucks in SUVs here. Those are big vehicles, big dollar vehicles, higher margin vehicles, right. It's easier to still profitably produce those in north America with north American labor rates where sedans, smaller vehicles, lower dollar lower margin, you know, there's a higher, you know, import percentage there. Uh, so, so that'll happen.
(11:34): I mean we don't sub cause some, you know, we still see as of this year, you know, internal combustion engines still 88% of all vehicles sold. Uh, yeah. And some auto manufacturers, you know, they're, I think, you know, Ford, they've got their, their electric F-150 coming out and you know, it'll chisel away at it, but we don't really subscribe to the, you know, I can't remember if it was GM or Ford or probably all of them at this point being like, oh, we're done with internal combustion engine by 2030 or 2035 and that's just not gonna happen. I mean, it's just not, we don't have the raw material supply chains. We don't have the rare earth supply chains for batteries. We don't have the electrical grid network charging station capacity to do it. Uh, so it'll be little bites probably every step of the way. And it'll be accelerated by these fuel costs. I mean, politicians, you know, certainly the current administration, uh, big fans of EVs, uh, but they can only drive consumer behavior so much, you know, from the soap box and saying like, we would like you to do this, but gas at four 60, uh, you know, five, five, you know,
(12:31): And there's not a lot of options. I'm looking at it from, you know, from the standpoint of a construction business owner, you know, I mean, it'd be nice if there was an alternative, but there's really not a lot of options to run out and to go buy electric pickup trucks or larger, you know, vehicles like that. So Exactly and expensive really expensive too. Yeah. You had said that single family construction can can in in many ways be an indicator of the economy on a broader scale. Where, where does that fall right now? I mean, where do you see that? Yeah, so, so single family in particular, cuz multifamily is a little different. It, it almost behaves more like a commercial market sometimes, but single family is very emblematic of, of the health, wealth and, and behavior of the consumer. Uh, so, so we generally see that single family housing starts, we like to look at starts, um, at the us level is, is a pretty great leading indicator for the economy. So, so we saw that those rates are growth maxed out late last year from a high point. And that it's decelerating right now. We are seeing that the single family markets decelerating, uh, you know, starts annualized or up 7.1% from a quarterly rate of growth percent. It's even lower than that 3.9%. So what that's telling us is that starts by volume they're up year over, uh, year, over year and quarter over quarter. But those rates of growth and rise are coming down. And that started late last year and that's basically preceded what is now a decelerating GDP growth rate trend, a decelerating retail sales growth rate trend. That's really intensifying to the downside right now. So that's, it, it kind of did what it always does. It, it tells us what's gonna be happening in a couple quarters from a macro perspective. Uh, and it's done that again, this cycle. So, so it's definitely the, the, the tides are turning a bit from a, a housing perspective.
(14:04): As I said, I'm a pretty avid fan and listener. And one of the things I, I tend to see that you guys will say over and over again is on the residential side anyway, that 11 months of rising interest rates before you see a momentum shift, where do we kind of fall in that cycle? Sure. So we're, we're starting to feel the pain right now, essentially. So we saw that that rates, you know, really bottomed out at the end of 2020, you know, the, that, that the low point for 30 or fixed came late 2020, you know, remember we were averaging below 3%, which was crazy. I mean, that was never gonna stick around. Uh, and then they started to creep higher, you know, throughout 2021, but nothing, nothing meaningful. But now of course, anyone paying attention has seen that, that that rate environment has shifted. The fed is pushing short term rates, higher 10 year treasury yields, which, you know, it, it is worth paying attention to what the Fed's doing, but generally directionally the, uh, your, your 30 year fixed rate is D is gonna track what the 10 does. So we've seen the 10 year treasury yields going towards 3% has floated those 30 year fixed, you know, well, out of three, out of four now, north of five, you know, five and a half, 5.4, uh, I believe is the more, most recent average.
(15:10): So I that's a big deal. I mean, you know, these perspective buyers, you know, when they were, you know, the, the prequel math worked at three and a quarter, but at five and a quarter, not so much, you know, what they thought they could afford, they can't, uh, so they gotta trade down in price point, which is tough in this market, cuz everything's going so high. And for, from a builder perspective, it's getting more challenging, you know, to build those starter homes with material costs, land acquisition costs and everything else. So yeah, so that's, we're gonna see that rise that started to pick up late last year. We're already starting to feel it, but it's, it's gonna continue to feel that rate pressure in the second half of this year into the first half of next year, which is why we think housing construction growth continues to slow down for the balance of this year and, and into the first half of next year. Right. And you know, something that you and I even talked about it earlier, you know, people seem like they still are, are tolerating to a certain degree that the cost increases, you know, the, the rates going up. And for the most part, I mean, our listeners are, are probably building more of a, you know, mid range to custom home and up versus entry level. Mm-hmm when, when, when do you see it that I guess maybe the shine comes off to where people are like, wow, it's just really expensive to build this custom home. Is it any indicators that that is gonna start to happen?
(16:19): I think when I've worked with folks, you know, cuz I work with a lot of folks that are, are serving the industry in, in various ways, whether, you know, it might be like a high end, uh, appliance manufacturer, uh, that that basically is only gonna go into, you know, very nice homes. Uh, and we generally see that they have a, their business has a very strong correlation to the stock market because you know, the, the high net worth folks that are building and buying custom homes that are, you know, gonna be in that high, uh, you know, high six figure or typically breaching into the seven figure threshold at this point, you know, they're, they're not as effective like inflation right now is like inconvenient for them, but it's really not really gonna change their consumptive decision, making all that much. Like if you're making $45,000 a year and your, your gas budget has to double in a short period and you know, your utilities bills go up, food goes up that that really hurts, you know, inflation really pinches the lower, you know, middle to low classes, much more where if you're making high six figures or if you're making, you know, millions, you know, it's, it, it just doesn't change your behavior that much, but, but market shifts generally do because you know, like we're seeing the market duress right now, you know, 20% peel off in the S P five and you know, 30, 40, 50 plus peel offs in like some of these big, hot tech stocks that we're soaring in 2020 and 2021 that can start to ding some consumptive behavior.
(17:33): So, so it'll probably hit, I think, all price points of the market in terms of the slowdown. If it hasn't already, if, if listeners aren't already experiencing it, it it's gonna, but we really just see a bending of this housing cycle, not, not a breaking, you know, we have a soft landing built in, we don't think starts, you know, on a unit basis goes negative. Uh, this cycle, we think that growth rates basically get to close to zero, zero to 2% growth for this year, which still means, you know, 1.1, 5 million units constructed this year sign is last. So, so it's still a ton of work and, and probably more than they'll have people or materials for quite frankly, but yeah, uh, it's gonna, if anything, you know, our silver lining to this slowdown is that it's gonna take some pressure off of supply chains. You know, we've seen lumbers started to calm down a bit. Now I'm, I'm hearing more kind of electrical component issues, you know, garage doors, window. I mean, everything it's like, it just it's like the worst thing. It changes by the week. But, uh, we think that this slowing pressure cuz all these manufacturers, I mean they're swallowed, you know, late 20, 20, early last year. So they've been trying to move mountains in terms of building capacity, hiring folks. But all that takes time. You know, if they green light, a big capital project say, oh, we're gonna expand our, our capacity. If I'm a window manufacturer that doesn't happen overnight, you know, that take a year or two or two and a half. I mean, it, it takes a while for that. So, so we're gonna see a lot of that fruit being picked here this year and next year in terms of when they, you know, kind of green lighting, okay, we're gonna do this.
(18:51): And they, we're probably making those decisions like early, mid, last year saying, okay, this is crazy. We have to, that's gonna start coming through this year and into next year as demands cooling off, which we think is gonna facilitate some supply rebalancing and, and hopefully make, you know, lead times start to move sideways instead of longer. And eventually they're gonna shorter, um, which will be nice, uh, in a nice change of pace. So we don't think it's all bad. We think it's kind of a necessary, slow down to let the supply side of the economy catch up. Probably a good, healthy, deep breath for those of us, like you said, take a take advantage of this is the time to kind of catch your breath. Let's supply chains, catch up, get your house in order. So to speak, you know, in terms of your Business. Yeah, it is, you know, like you said, I mean, it's, it's healthy. I mean, if you look at the housing market out there and you just like from a buyer perspective, is it healthy or sustainable to have, you know, 30 offers coming in like an hour after the open house starts all over list price, all waving inspection, like in the existing home market. I mean, that's, that is not healthy market behavior and, and nor is it sustainable. So, right. So we think that it, you know, we get closer to normal, like where a house goes up and you have a reasonable amount of offers, but it's, you know, probably not going for, you know, mega dollars over list and, and, you know, just kinda gets back to like what we used to know, which, you know, feels like forever ago at this point.
(20:04): But, and even though we see, you know, the doom and gloom headlines, you guys are still not really forecasting any, any procession over the next year or two are you, We're not at this point. So, so our GDP forecast, you know, we're sticking to a soft landing, which would be no recession. You know, we have, we do have GDP going sideways late this year and into early, you know, the first half of next year, which is statistically about as close as we can take it to recession without going there. So, so for listeners recession technically would be two consecutive quarters of GDP decline. Uh, so we don't think we get there. We think we move more sideways and so it's gonna feel different. I mean, it's already starting to feel different, you know, you're getting whispers of it. Uh, it it'll start to become a little bit. This slowdown will be more, I think, perceivable for folks in the second half of this year, first half of next. Uh, but you know, now the headlines have gotten so hysterical and, and the market, you know, folks always try to equate stock market with the economy and it's, you know, we pay attention to it, but it's really not a great leading indicator.
(21:01): It does not have a great correlation and it's not reflective of, uh, you know, sometimes it is, but, but not always, is it reflective of, you know, what is, or what will be happening? So, you know, once you start, you know, you're seeing correction now, you know, bear market breaches for the S P five and the NASDAQ, you know, everybody freaks out. So now I think the headline is kind of over corrected at this point, cuz and we're, we're having meetings every week. I mean, cuz there's, it's global volatility, financial market volatility. So we're keeping a really close eye on these things, but we're struggling right now, you know, other than headline sentiment problems or the stock market, other than those two factors, as we look at kind of our, our core data points and leading indicators, we're struggling to build a strong, empirical case to say that we need to take the bottom out of this forecast and say, okay, it's recession time for late this year, next year. Yeah. Uh we're we're just not there yet. Um, you know, our, our antenna they're way up. I mean we're, I would say my, you know, the, the pucker factor, like at the start of this year was maybe a five and we're probably like an eight right now, so it's definitely more concerned. Um, but,
(22:00): And I think this ranking is that there's been so much growth in some of these sectors, especially like constructing that, that even it could still be growing, but just growing much slower. And that still feels probably like there's been a drastic pullback. Exactly. That's, that'll be the challenge. I think for folks perception wise, you know, let's just say like the normal speed limit for the economies, like 65, we've been going one 20 for a year. And I mean, housing's been going one 20 for two years at this point, basically, you know, by April it was like, okay, everyone's getting outta cities, buying homes, building homes, let's go. So getting back to, you know, going from one 20 to 65, it's gonna be like, what the heck happened, but it's like, well, no, this is normal. We're, we're getting back to normal. This is how things usually are. It's, you know, the last two years is, is the exception, not the rule. Uh, so we're getting back to the rule, but yeah, that transition period, um, you know, might catch some folks off guard, You know, and obviously last time we talked a lot about the, the supply chain, which I think we all know is that's just gonna take some time here. And obviously if things do slow down a little bit, that's just gonna give then opportunity for some of the supply chain stuff to catch up. But the other thing that we talked about, I still don't know what, you know, what that solution is gonna be, but the, you know, the labor force and we talked about putting the eye towards the golden retriever puppies, you know, the, the, putting the effort into the, the younger folks and doing some training. What are you seeing on that? Or what other things can folks really be thinking about when it comes to attracting and, and retaining that kind of talent? I mean, it's, it's a shift from just running a lad or just going and picking somebody, you know, I mean, it's gonna take some, some effort to bring on good labor.
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Want access to the resources that can take you and your team to the next level. One call could change everything. So when I've been on the road doing keynotes or, or just with my own clients, so we do consulting and forecasting work for, you know, I, I tell 'em, I said you've had three major pain points the last year or two it's been labor supply chain inflation. Two of those three will get better by virtue of the slow down supply chain inflation. Labor's not gonna, uh, labor. It it's, that will be a persistent thorn in the side, cuz the slow down is not gonna erase 11 million job openings. It's not gonna erase, you know, three to 400,000 job openings, uh, in construction alone. Uh, it's just not and demographically fundamentally we are not structured, structured in a great way. You know, as you look at, you know, average ages within the trades, exceptionally old, I mean this it's actually gonna get worse generally. I mean this year might be the worst from combining the wage inflation and the scarcity, uh, aspects of it, but just the, the scarcity of it.
(24:41): It just doesn't get better moving forward. It, it might get retention might get a little easier next year just because as economic cycles turn over, uh, and the housing cycle, you know, is cooling off, you know, turnover and turn might cool off a bit. Cuz folks kind of tighten up in, in the job, hopping, cools off a bit, but barring a major recession, which we're not forecasting. We're just not gonna erase enough labor demand for that to get markedly better. Uh, in the next couple of years, I think what folks can do right now is we have to push hard on comp increases this year for, for retention, which I know business owners don't love to hear, but it's just, that's the reality. You know, you, you have months of, if not years of resources into the folks you already have, they are productive. They know what they're doing. They don't have to be handheld. You don't wanna lose those folks and then go into what is a bare and wasteland of available talent right now. Cause there's just nothing to get. So, you know, right now with CPI at, at 8.3%, basically what that means. If, if your employees have gotten less than 8.3% wage increase, they're, they've moved backwards. Their standard of living has moved backwards relative to their costs. And you know, if, if they're getting a 4% bump this year or something, they're, they're not gonna feel great about it. I mean, that's not even covering half of it where, you know, three years ago when inflation's, you know, 1.7%. Yeah. You know, 2, 3, 4, even 5% wage increases. That's great. That covered inflation gave them a real cost of living in, uh, real, uh, cost of living adjusted wage increase and on we go, but that just doesn't work this year.
(26:04): So I've been telling my clients, you know, lift as heavy as you possibly can on comp this year to get as close to that 8.3, if you can or exceed it, if you can, cuz that'll go a long way towards keeping folks knowing that next year when inflation cools off and gets closer to that low single digit number, you can, we can go back to normal raises next year, right. But if we wait, we're gonna lose 30% of our, our workforce on the way there and with no pool to, to fish into, to, to replace it. So, so I say do the big lifts this year, of course, you know, to gotta take price in, in, in the business to protect our margins so we can still exist and yeah. To, to pay our, our, our wages and our workers. But, uh, but I, I would say don't trying to wait it out. I don't, think's gonna be a profitable strategy for folks in the long run. And that's the battle too. I know of, of, of folks trying to, obviously if you've gotta increase your, you know, compensation, you're paying out, you've gotta pass that along and in increase whether it's your rates or your markup in this challenging environment where every builder or model are out there, every time they're pricing stuff, you know, they turn around there's cost increases across the board. But I think to your point gotta be vigilant. You just have to, you have to do everything that you can to get those price increases in there in this market. It's the time to do it.
(27:17): It is. I mean the narratives out there. So it's, you know, kind of folks understand what's happening. And I think, you know, the good news is that the material cost pressure is gonna start to come off in the second half of this year. You know, we're fortunately it's not like last year. I was just like we talked about, everyone was talking about lumber every single day. I mean, lumber markets are starting to cool off a little bit. Uh, but we're gonna see other component inflation pressures are gonna start to cool, uh, as well. So maybe we can look okay. Okay. Yeah. We're gonna have to press hard on labor, but we might not get pinched quite as much on the material side in the next year and a half as we did in the last year and a half. So it'll balance out a little bit and something else you and I talked about earlier and I I've talked about it with many business owners. It's the challenge of everybody's in insanely busy, but I, I like to equate it to making sure you're busy doing the right things. And there's been challenges around people. You, I, I see lots of folks out there growing revenue, but their bottom line is actually going the other way. Is that something you're seeing kind of across the board? Is it maybe inherently be in our industry because we, we are plagued with some of these, you know, supply chain issues, um, or is that just a trend you see happening?
(28:22): I, I think that that's gonna be the, the main narrative for the next year and a half. Uh, a lot of my clients, you know, maybe they didn't have the best top line year in 2020, but they were actually ended up being super profitable. And then last year was kind of like, yeah, the margin pressure started to build late in the year, but the year as a whole, the top line was huge. So their margin was great, but this year we're gonna start to lose pricing power in the second half of the year is demand cools, but our costs aren't necessarily going away. So I think there's gonna be a lot of, of kind of top line hero, bottom line, zero type outcomes this year and, and potentially next year too, for folks cuz that's, you know, we saw it, you know, last, uh, you know, in the last couple weeks, you know, Walmart and, and, you know, target came out with some of their earnings and you know, top line was incredible, but they're feeling the margin squeeze on labor. They're feeling the margin squeeze on freight and fuel. And, and so it's starting to chisel away. And I think that, you know, as we think about the stock market, you know, that that's like the next salvo to come in this market volatility. Like we haven't, most of the selloffs spend more, what is the fed doing? Looking at global volatility, we haven't even gotten to the bad earnings part of the, the cycle yet. And the, the cut forward guidance. Like we're, that's just starting right now. Right? Uh, so, so folks are, I think starting to realize that, you know, it was, it was a lot of fun taking price every, you know, four weeks last year, but they're not gonna be able to do that in the second half of this year. They're not gonna be able to do that next year cuz demand's not gonna be able to support it. Uh, and that's gonna lead to, to some margin pressure. So that's, that'll be a, a challenge I think for folks,
(29:47): Something else that we see, I'd like to get your perspective on it. And I've talked to a few other builders, it seems like there's a divide. And I guess it's a divide it's happening across our economy, probably even in society. But there seems to be like a, a shift towards there's going to be luxury ultra wealthy and then everybody else, you know, this, some of the stuff in the middle, especially this middle market type construction homes, obviously I see those folks probably not being as excited to, to purchase a home if they can't borrow as much, if you know, if money is more expensive to borrow. Um, do you see that as, as something that could be trending that way as, as well? Yeah, it is. What's been really unfortunate. I think about the COVID policy deployment that we did, like from a, a monetary fiscal standpoint, was it just massively benefited the wealthiest people. I mean, if, if you were involved in the market, if you already owned homes or multiple homes in expensive homes, you made out great because the massive liquidity push, you know, the quantitative easing loosen easy money conditions, you have to have assets to ride that bubble. So people that already had 'em wrote it and people that didn't got killed, you know, people in the low to middle income, maybe they were renters, okay. Here's $3,000 of stimulus checks by the way, the home that you want now cost 45% more than it did two and a half years ago. Uh, and the stocks that you don't own went up 150% if you weren't market involved.
(31:19): So it was pretty incoherent policy from the start I think. And of course, if we think kind of take a long view, you know, as a nation, we didn't have any of that money. I mean that was $6 trillion worth of debt in about 11 months. So that was not smart. So I try to be empathetic with the policy makers, cuz of course, you know, they were doing all this on the fly. They didn't know what was going on. Um, but as you look at it in the rear view mirror, now it's global fly chains are broken. We're more indebted than we were before asset prices have gotten outta control. We're starting to see some air come out of the, you know, stock bubble. We don't, we we're not as concerned about residential real estate pricing, but uh, but yeah, it just benefited the, you know, folks that already had wealth, they made a ton of folks that didn't, they fell further behind and that's yeah. And I don't think that certainly was not the intended outcome, but rarely does government policy yield the intended outcome. It's usually exclusively unintended outcomes, um, that come with that.
So that is for sure. Uh, you know, cuz I see y'all hear reports. I think I've heard a report that, you know, they say we're, we're 5 million homes under what we need, you know, new construction homes that will be need in this country. However, the, of those 5 million, the vast majority of them are the entry level, lowest priced home you can get, which is what is the most difficult for the small, you know, business owner, home builder or modeler to, to do, you know, I mean, that's, you've got your big builders, your mega builders, but I, I lo when I start to, I try to put that in perspective, you know, in some cases folks will think like, well that's a rosy picture because you know, there's demand for over 5 million new homes. Well not necessarily not the, the homes that we can compete to even build or produce, you know? And, and that's where I said, I see this gap sort of widening anyway, it's just their perspective. It's something that we've noticed myself and a few fellow builders from Roers and was wondering your perspective on it. So I don't think it's and yeah, I think we're seeing that, like I said, in, in the economy and society in general,
(33:08): So, you know, look the entry home thing, it's I, I did a presentation, uh, webinar to the national association of home builders last fall. And the number one sided concern, or at least one of the top amongst those builders was land acquisition cost, cuz that that's, you know, just land costs with everything else is the liquidity surge from the, uh, from the stimulus. I mean it, it launched everything including land and it's just like, okay, so now my land costs are up huge. My lumbers up 3%, 300%, everything else is up my labor's up, but I'm still supposed to get a $200,000 home to market in the starter, you know, or, or three or, you know, whatever regionally, whatever your starter home, uh, starter home price is. It's like, how do you do that? Other than making 'em way smaller, I guess. I mean, how do you, how do you reach that price point and make money and, and, and you'll be able to continue to run the business. I mean, it's really challenging. It's very challenging. I think that's why, you know, like I said, as a small business owner in, in construction, you can run the numbers and look at it and it's, it's nearly impossible to build something that would be considered affordable. It's very difficult. And then that also lends me, I've noticed here and I know it's happening all over, but I I've really seen it start to take off here in Charlotte, but we've got these, we've got these investment firms, you know, coming in and buying entire neighborhoods, you know, which just, I think puts even more pressure on, I, I guess, turning 'em into these rental type setups, do you see more of that happening?
(34:26): Yeah, we do. I mean, so we're seeing, I think that it's like 33, 30 4% or something of, of home sales have, have gone to like these institutional capital fund buyers. Right. Um, which I'm kind of torn on that cuz you know, at ITR, you know, we're Austrian economists, you know, we're generally, you know, opposed to government involvement anywhere cuz cuz as folks see, I mean when the government gets involved, usually some small, good things happen, then some really big, you know, bad unintended things happen. So I don't necessarily, I, I don't want them to come in policy wise. I, I just, I wish those folks wouldn't be buying those homes to, to let people that actually wanna buy the home, build a family, be part of the neighborhood and the social fabric be able to get into those homes. So like I guess like my, my inner sentiment would be, I wish they wouldn't buy them, but also, you know, from a macro perspective, I mean it's, it is more demand for homes, which, which is a good thing. If, if you're, if you're selling something and there's more demand for it, wherever it comes from, that's a good thing for your business. If you already own something that there's more demand for, that is good for that asset, that price. I continue to thank my stars that I actually bought a home back in, uh, 2016. I, I just, I kind of weep for, for folks my age that are still renting. Cause at least I've been in the game. Like my wife and I were looking for a bigger home right now, uh, you know, in a school district town. So at least I was in the game where I own a home. That's been part of this, but I'm trading up. So whatever percent I ha of the appreciation I got on the home that I have, whatever I wanna buy also went up that percent off of a higher price point.
(36:00): So I'm still kinda losing on that equation, but at least I had something to appreciate, but the people that are renting right. You know, they they're feeling walled out right now. Like they were struggling to get there three years ago. And then now, you know, tack on 20% growth, you know, roughly for 2020, and then another 20 on that last year, it's just like, how do you do it? And so buyers they're like you said, buying up homes and it's just a glorified multifamily. It's just a single family rental. And, and that may be the, the only attainable path forward. So I dunno if that's a great thing, but it's what's happening. And, and actually their percentage of, of home costs actually might go up this year, cuz they're sitting on ungodly liquidity, you know, they're, they're looking for yield. That's why they're doing this. And they think it's a smart play and they're buying with cash. They, they don't care about rates. Um, like someone that's, you know, putting 20 down by borrowing 80%, you know, they're, you know, five and a half percent, which historically is not that high of a rate feels horrible coming out of 2.7, 5%. Yeah. And, and the rate pressure's much bigger for those folks. Uh, of course, you know, I wouldn't, wouldn't be able to let you go without asking about IRS's 20, 30 economic prediction and has there, you know, has anything altered where you guys are going with that? You're thinking on what we're gonna see towards the end of this decade or? Uh, no. So for any new listeners that, uh, don't know what we're talking about. So, so ITR economics as a firm, uh, we believe that there is a great depression coming at the end of this decade around 2030. And we've been saying that since I started with ITR, so I started with ITR full time in summer 2014, right? When the, uh, the book came out from Brian and Allen, Bolio the Bolio brothers that, that own the business and all of the underlying assumptions that that expectation was built on, you know, from a, a debt standpoint, from a demographic standpoint, they're all what we thought they would be, if not worse, in the sense of, you know, we nor, you know, pre COVID, we were running about, you know, 800 billion to a trillion dollar deficits annually. We did six of those in less than a year fighting COVID, you know, firefighting, the COVID lockdown.
(38:00): So, so we've been sticking to it. And again, we're getting close it's 20, 22, you know, my first week at ITR, it was, it was weird. It's like, all right, Connor, you know, here's your laptop, here's your nook where you're gonna be working conference room's over here. The economy explodes in 20, 30 there's cookies downstairs. And I was like, wait, what, what was that last one? They're like, oh yeah, there's cookies downstairs. You know, Kelly brought 'em they're really good. I was like, no, no. The one before that, about the economy imploding in 2030. And so I read the book and, and eight years ago when I started it, you know, 20, 30 felt so far away in 2015. Right. You know, felt nebulous was like, okay, am I even gonna be around in 20? Like, but now inside of a decade and, and kind of watching all of it play out in real time to a T if not worse, you know, it's, we're, we're on track again, we're, we're squarely on the tracks now. And then we'll, you know, the tracks just go off a cliff at the end of the decade. So, uh, so we think that that's still coming. We haven't pulled it in. That's been a big question folks saying, is this gonna happen sooner now? And we haven't officially pulled it in. I think I would probably personally hedge, you know, for, for maybe a, a 20, 28, 20, 29, but, but officially we're, we're sticking to, to 2030 for when the, the music stops so
(39:06): To speak. Right. And I mean, for anybody out there, that book is the prosperity in the age of decline. And I think 2014 was when I had first read that. And it's also, I mean, what's great about it is it tells you that there, there, there will be opportunities as well. Yeah. Um, it's just putting yourself in a position being aware of it. What's to come, I guess, with that, you know, saying over the next, you know, six to eight years, what should, what should these small business owners, uh, you know, folks in residential care, what kind of things should they really be focusing on to get the most outta the next six to eight years? Well, I think they should be aggressive in the next six to eight years. I mean, we, we feel bullish about single family housing for at least the next three to five, uh, at least the next three or four years. I mean, we, that that 5 million, you know, home shortage soundbite, is it that, to like, to the number, very difficult to say, but it's evident that we're, underbuilt relative to demand. And we think that that stays, we think that the next, you know, three to four quarters, you know, we're, we're gonna soften up here, not maybe not quite a pothole, but, uh, you know, things are gonna get more challenging in this rate environment. And we're gonna cool off and normalize from the crazy growth of 20, 20, 20, 21. But, you know, for the 2020s, you know, we, and I was pounding this drum even before COVID, I just felt like my generation was poised to enter those home buying years and that we were, you know, that was gonna start to really juice, single family growth, and COVID put that on steroids.
(40:24): Um, so it'll cool off from that, but, but we feel good about it. So I think it's be aggressive, you know, try to build the business, try to make money on the way there, you know, we still think, you know, hire where you can invest where you can in the business, but start to watch your leverage for the second half of the decade. What we don't want are folks levered up to their eyeballs heading into 2030s, you know, starting to move into more conservative position, heavier cash position, make sure the balance sheet's strong and have some liquidity to draw on as things get more difficult, which cuz they will, by the time we get to the end of this decade. But, but we don't think that this is probably too early to start bunker prepping at this point. I, I think we think that there's Hey to be made, uh, while the sun's shining for at least the next several years. So, so I try to stay optimistic, but again, kinda keep an eye towards the end of the decade that the clouds they're far off, but they're closer than they were. No for sure. And you know, thank you again for taking the time, like I said, I've been a big fan of ITR. Appreciate you coming on. It's it's, it's kinda like an, like an update for us, you know, I think it's good for a lot of folks in, in our industry to, you know, maybe pull their heads out of the clouds a little bit just to, to think about some of the, the economic factors that, that are going around them again, appreciated and best of luck. How can folks find you if they wanna learn some more or, or learn about IR?
(41:36): Sure. So if you wanna follow along with us, so it's ITR economics.com. Uh, we have a number of subscription products, you know, for folks that, you know, really wanna get engaged, you know, our trends report, uh, it's a monthly subscription, which is kind of ideal, particularly for the small business owner. Cause it's a low price point, uh, in there, if there's a three or forecast for single family construction and multi-family construction updated monthly with analysis on the latest trends, what are we seeing? What are we worried about? What are we not? Um, but there's a number of ways we do a ton of stuff. So you don't have to pay for it all on the website, you know, blog posts, uh, what we call trends talks, which are a little like, it's like a five minute podcast. It's not even a podcast cause we don't have guests. It's just basically we try to just unpack things, things that you see in the media that generally get covered very poorly from an economic reporting standpoint, we try to say, okay, this is what's happening. This is what matters. This is what we're worried about. This is what you should be doing. So if you just head to our website, there's um, a lot of good ways to, to follow along with us there. But, uh, I was, I was happy to come on. I, I was excited to come on. I, uh, we're getting a ton of media requests these days and I'm actually saying no to almost all of 'em because I'm just so busy with traveling keynotes on the road. But I, I told Lindsay in marketing, I said, builder nuggets is a go like that, put that one on my calendar. I, I wanna do that one. So
(42:46): We do appreciate it, man. We, we know, you know, everybody is busy and, and certainly value your times. We certainly appreciate it. So, um, anything coming down the pike, that's exciting for you, anything you guys have planned for the next, you know, six months to a year, whether it's personal business side or, Um, you know, personal side, like I said, I got through the wedding, so I guess, you know, I'm, I'm on the clock for kids. So that's, I dunno if that'll be this year or next or when that's coming so personal life, that's probably the, the new shift in focus, but uh, you know, professionally at ITR it's, um, we're, we're kind of on just trend watch right now. You know, we always are, but like I said, pucker factors, risen global volatility is, is very high. So it's just, we're, you know, for folks that are thinking about staying engaged with ITR, you know, at least keep an eye on the website cuz you know, if things break the wrong way, if the fed over tightens, if we see any more of these geopolitical black swans and we have to go to in a recessionary direction, you know, in our macro forecast or our thinking for housing, you know, that content will show up on our website. If we cuz that that's a big call for us. If, if we make that call, it's it won't be like we sneak it in there and say, oh, by the way, we lowered our forecast, you know, we're, we're gonna ring that bell pretty loud. So try to follow along there. And um, like I said, in the trends report, if anyone wants to subscribe to that, it'll be covered in depth in there if we get to that point. So like you and I were joking beforehand, I, uh, I was hoping for a blissfully boring 20, 22, but it, it appears that that's not in the cards for us. So it's, we're gonna be pretty locked in here this yeah. This summer, which is a business busy time of year for, for all you folks, as I know, so,
(44:12): And back to probably events and some travel as well. Right. So, Yep. I got through the, the spring slate here. So it's gonna cool off a little bit this summer, but then this fall it's gonna get crazy again. I'll I'll be the road man, living, living on the road. So it'll uh, that'll be fun. So I'm gonna recharge the batteries here. I got an fishing trip here this weekend. I'm looking forward to, so, uh, there you go. So recharge the batteries here in the next few weeks and then get ready for the second half of the year. That's good stuff. Well, Connor, thanks again. Like I said, and congratulations. We hope to talk again soon. Thank You very much.
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