In the latest episode of Exchanges at Goldman Sachs, Toll Brothers CEO and Chairman Doug Yearley and Terry Hagerty, Goldman Sachs’ co-head of Homebuilding and Building Products, discuss the outlook for the housing and home building market in 2022.
This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
This is exchanges, Goldman Sachs and I'll Nathan; s, fingers, strategist employment, That's me sets today we're going to be talking about a sector of the economy that affects us all: housing, the pandemic, ignited what can only be described as a home buying frenzy inventory record low interest rates and shifts and where we work have led. Beating wars and sky high prices are also starting. Twenty twenty, two with new uncertainties, such attacks, Mine's inflation and a new coded variant that slowing economic growth, so I entering an infection point in the real estate market to help us make sense of the housing market and what lies ahead in twenty twenty two. delighted to be joined by the yearly seal, told brothers and Terry already cover
Home building and building products invests in thinking, echoing sacks dad back under the programme itself, which were heavily exhaustion. Doug. As I have just mentioned, we ve been in the midst of a white hot housing market for the last two years, where demand for new homes have essentially outpaced supply. First time while some of the drivers of this demand, as well as the challenges that have made it hard for me, home construction to keep pace and also how tall butters has navigated this environment So if we go back to the winter of two thousand nineteen two thousand twenty the market- was poised, to really be strong, there had been. Ten years of under supply of homes, millennials seventy million millennials or just approaching their age. Wanting to own their first house so before? In March, we were enjoying the beginnings of a really good winter spring selling season,
Because of this imbalance between supply and demand? Over the last decade, the west, ten years leading the covered this country bill singing, If me less arms and each of the fire for decades, then covered heads. Already suffering from fifty dollars. The thirteen dollars two weeks, whilst we never thought so another home. The first couple of months of the spray of twenty were slow, as everybody was absorbing this new normal and in our all, at a lumber, walk the dog and suburban philadelphian. Some. Came towards you walk in its argued by the other side of the street in our skies Nobody know what's going on by May. Just two months after we all went home, we started seeing these green shoots of sick. arrogant, demand coming out our sails team. We state open and in of our markets, we are allowed to continue to build some states, shut down construction
through the summer. Twenty all the way through to today we have experienced the hottest housing market. I have seen In my thirty two years at all brothers and it was driven by those fundamentals I mentioned going into covered of significant imbalance. of supply and demand ten years of ends up demand that hadn't come out. The millennials now in their midst thirties buying their first home very low interest rates. In the spring of twenty, the FED drop rates pretty dramatic. We. So if you were a her in the spring of twenty, because rates were so low, you could, on a home for the same monthly came if you could scrape together ten twenty thirty thousand dollars for a deposit, We look at them off the payment for the start of our market. That's what led to start our market led for those reasons, just a formality was tremendous, the retail markets got incredibly tight, as very few people were putting their house on the market. They didn't want. People coming
trailer homes touring their homes. You know the in the midst of the worst of covid, and so the new homes compete. Humble is all compete with resale inventory. That's right up prices. Went up dramatically on the recent market, which gave people equity in their home. They never they had so whether of the trade up to a new we're bigger home with more equity, the stock market, started performing well, so those invested in the market were wealthier, and we have these tremendous migration patterns because you could work remotely. It became a perfect storm. You know it was a category hurricane that turned into the perfect storm for our industry. For all these reasons, the market just roared it slowed, let all it's not free the anymore. It's really good. Our prices I mentioned on our needs.
Back in December, in our prices are up twenty five percent per year on average around the country, whose cost pressures that's an obviously not dropping doll, profitability, lumber and other bill immature drop significantly. Supply chain issues are acute like nothing. Foreseen, but these have been really happy times for the builders and it feels like going to continue. The certainly pressure on rates has some pressure with affordability, because prices are up and the retail market is the tightest its ever been on record. Can't get a house in so that demand supply imbalance is. Can we continue for a long time? Let's talk a lot more about that topic of foreign nobody, their environment is changing as we discuss. Completion is rising interest rate, are rising and by extension, mortgage rates are like the moving higher were also beginning to see the cost of raw materials and thinking lumber rising again. So what impact?
could these various factors have on home, buying demand and home prices going forward? And how is that all Hacking, tolls strategy, sure so we're not sure where rates for land through all this, but it's pretty clear there going to be going up so, even though the fact it has an officially had their first rate. Increase was many believe could be as early as March and remember. The FED rate is not mortgage rates federate is a very short term raid and reiterated the thirty year. The correlation, it's not always perfect, but there certainly a correlation, but the rates are moved. A mortgage rates have already moved in anticipation, I think, coming, we haven't seen any negative impact, yet I think raised because of it. the market is will probably have to get into the midst four percent, almost another one hundred basis point or one percent increase until you start scene, I think a bare impacts, there's no question. This is common sense that when you're prices up whether be twenty or twenty five percent year on year and more
rates are going to go up. There is pressure, affordability, whether that fresher those this market down or not will have to say right now. There is so much more demand than there is available supply available homes to buy whether they be resale homes or new homes that this is gonna be very different than other cycles. It's gonna take longer, it's gonna take higher rates. It's gonna, take more price increases, I think until we feel the affordability pressure and the migration trends again because of covert because our about working, but also because of what I described- rigour with which is just people- leaving the northeast they're leaving. California, because the cost of living that migration trends tend to be from very expensive states, New York, Massachusetts, New Jersey, Pennsylvania, California, where, homes are more expensive taxes,
the higher the cost of living is higher in two more affordable places, like all in Texas, Boise, Idaho, Reno, Nevada, LAS Vegas, Phoenix, Denver, Florida, Charleston Raleigh in all these smile states, so there is less pressure on affordability, when you're trading out of a more expensive area to a less expensive area, So I think that's another reason why it can take longer to feel depression, carry let's bring you in conversation dog is obviously given us. Some really great perspective, but from yours see an investment banking. How is the boom in the housing market affected strategic activity in the building products and home building sectors? More broadly and in the range of seals that you speak to most focused on this year shores,
the short answer is we ve seen a meaningful increase in strategic activity in the ongoing space, the building products space and also with Billy Products- distributors folks across the sector issue over twenty million dollars of actually in two thousand twenty one, which was double the revalue those two dozen twenty and Nineteen, the dry this activity was largely management teams across the sector experiencing rather demand and, more importantly, feeling very guy about industrial interests, Creasy, now exposure to the housing sector. So these things together, not surprisingly made it feel, like an optimal backdrop, to dig a business public through There was this idea with Eurostat merger. We also saw humbling and other products emanate, increase sixty percent from today Why? In addition, to just a very supportive housing environment. No raw outwork, threes
for this increase were some of the same drivers that have increased and the name more broadly across sectors, specifically hi seo confidence, inexpensive financing, embroidered shareholder and boards of work for strategic transit She- and I would say this- has been that across every sub sector of house and we continue to hear from seals and interest on my side of expanding and growing a footprint and for sellers right I that this is a very attractive valuation environment and it may be a good time to transact so witches sectors. Are those that sector is rarely seen more act, Kennedy than others, and use that to continue this year when he's from the buyers and sellers sure so You start with your second question. First, in terms of foreseen for buyers and sellers for sellers, it's really all about price sellers continue to feel good about the outward for their businesses and because it This value expectations really across all sub sectors, have increased for
I was, on the other hand, I would say it is two areas of focus. First, do you believe get deals dawn. The regulatory environment has become more challenging, specifically for larger transformative transactions. Additionally, buyers recognise that we are in a many market, not dissimilar, lousy market right now in a market like as there is a balance between being aggressive enough to win compared actions, but also remaining disciplined on price. On your first, ass in the sub sectors. We expect to be active in two dozen twenty two. I think you wouldn't. He knew to see a consolidation among building products, manufacturers and building products, Maybe there is given These sectors emanate, has been a very effective tool for scaling businesses and creating shareholder value. Home building. On the other hand, while you will likely can t see smaller price, the old, I'm not as parliament we'll see large public public transactions and for this without going
The too much detail is that, when a hunger by another home Dover, they are not just buying the operations there. the buying a large land portfolio, given how land slows through financial statements. It typically takes about three years. the benefits of emanate to really show up in returns and earnings. So while I like You believe that there is a strategic logic for consolidation in ongoing sector boards in man. When things are going to need to be comfortable that the benefits may not be visible. for several years, but also love dumps perspective on that as well. Unless tablet then about the long term trends than you have already begun to speak to some of them, but we do have people there I recently in framing, doesn't know the influential how's the animals who predicted the two thousand and five housing top talking about them,
ethics slowing population growth, but that in itself might be a bit limit to demand over the medium and longer term. So how are you thinking about some gets longer term trends, and how do they affect your strategy? very optimistic and paused. On the one the term business the lead, ten years, as I mentioned, with the imbalance in supply and demand, good ten years, but it was steady and slow. It never got frothy ever got over heated so there was no need for a correction longer term Also, in addition, diabetes analysis of baby, being born families being smaller. You ve gotta think at immigration. You ve gotta, think about a second home market. particularly as more and more people are standing the opportunity to work remotely their focus on lifestyle issues and move in certain areas that they have wanted to live, and you have to think about obsolescence.
the existing housing stock in this country is aging and it is slowly being replaced now what I, the tear down business, but I live in an area. Suburban Phil I'll see you were with the small local builder, there's a lot of that go on so there's more factors and unjust birth rate, I'm not focused on the kids boring, today, and when they are ready to buy a home in thirty years from now, and there is less of them what that market will look like there's too many things that can change in the next thirty years were that's just not on the top of my last or even on my Lest we look out three to five years because some markets it takes that long to get land entitled The approval process is very tedious and that's actually the biggest supply chains, along the building is land, it's not readily available. You can't do whatever you want a piece of land that you buy the town will tell you what they may. Let you do if you jump through a bunch of hope, so
think with millennials, seventy million millennials beginning to buy a home and remain were. There now bind thirty five years old boomer. I had my first ass it twenty six, you I as a little bitterly compared to my friends, but only by a year or two, and I was newly married and we were poor at twenty six and thirty five, it's not unusual to have a dual income couple at thirty five years old making two hundred thousand dollars their first home is the toll brothers, three series which we now off and we don't just do the five and seven Bmw. We do the three We have many many clients who now thought that there for asylum will be its all brothers, but because they are older and wealthier, and we have come down in price. It's a perfect match. And so, if we continue to widen the net and as millennials just keep becoming of harmonious age when
want to own home, and then you get seventy million boomers, thereby Second home. Whether downsizing into those small states I mentioned so I'm comfortable with a graphic trends standing lower birth rates today, so I think, for the shorter term call three to five years fundamentals are in place to continue to see some great action. Why Isn T which made about millennials speaking. There is a perception actually that millennials have less purchasing power as a court, but that's not what you're saying no. using on your my opening Alison is. I think a lot of people have talked about this generational wealth cap, which is certainly true, a fact that a lot of people don't talk about is that right now you have Thirty five trillion dollars of wealth, New S control my folks over the age of seventy, the coming years that well, is going to be distributed to younger generations. Naturally, through inheritance investment, I just the general
I'm excited also again, while the wolf gap is real, it does deal like something that remedies itself over time. So a discussion. And so many trends dont want to be the ones. The trend that we can't seem to get away from this part cast is technological disruption It's always coming up in all of our conversations. You don't. We have seen a lot of innovation and how buyers and sellers of homes are using technology, talk about some of the opportunities and challenges for the home building sector from that perspective and hunger. Seeing that involve very great opportunity for the industry, because we ve been very slow to adopt new technology. I was out in the field my timberline boots on and blue Jeans workin out of a trailer thirty years ago, building houses and their built the same today you ve got thirty to forty subconscious actors. No, we don't own hammer, we don't have plumbing companies in electrical companies. It's all subcontracted out there very local MA
pop small businesses and from when you dig a hole to pour the foundation to frame the house all the way through it feel. Very similar today, as it did back then and I think that will be slow to change. We don't have national trades, though not all that sophisticated There's technology, that's hitting the industry rapidly when it comes to construction management, software and some of the back off it, programming. That is allowing us to be a bit more efficient in terms of how scared- the trades how we pay bills, how we run the job site modular concerned shit where the house comes out on four or five flatbed eighteen wheelers and gets put together in a week that as yet really caught on quickly with the bigger home. We build that are more custom. There is some opportunity for all say panel entrust manufacturing
which is the wall panels in the roof, trusses fact brothers, we around plants that do some of that. You know I recently announced that they're going to a three deep, contain community in Texas. the homes, are going to be printed with concrete out of the three, the printing technology. When that the exciting to see how that works out. Robotic swear what we call closed. all systems where a traditional panel that comes out of the wood, then you have to put the plumbing and the they say in the electric wires through that would on the job site but the installation the dry, while on. If you can put altogether words closed panel when you literally clipped the gather panel, the panel on a lecture clipped an hp see clip plumbing pipes that clip. You know this talk of that so for those companies have failed because they're just more expensive and it so hard for transportation to get
These components from the factory to the job site as lumber got really expensive. We sort of moving to steal and doing like gauge steel frame. Different trade ban you know the wood framer isn't ready jump into the steel framing, it's completely different, so it's slow to come fin tack, financial technology, the more each company software programmes, the title Many that's moving pretty well prop taxes with all its property tax ology, which is smart on tax. algae and how it operates and all the related gadgets and things that we can do There's a lot of opportunity back to where I started. When you walk a job cited watch, plumber in the mud, plumbing the house and is only five employees in a small company and he's happy working on two or three communities on only the northern suburbs of Philadelphia. That's the business, unfortunately, and so it's been a harder for us to bring these efficiency through technology
but were not given up. It has to change, it will change, but it is a difficult industry to flip the switch on. I really have died in terms of there's a lot of opportunity for technological innovation, turning home building price says in addition to some of the challenges that dog mentioned. Another thing that historically limited growth, the technology sector has been limited appetite for adventure, investors to fund early stage. Business is focused on changed the way homes or bill, and this is because most of these early stage companies, rather poor manufacturers, were required. what has happened to me, scale and profitability and investors about a preference from unpredictable that light businesses. I do you think, This funding dynamic is beginning to change and ass. These businesses raise more capital the scale more quickly and ultimately tried work that we have come
how much territory all very interesting and again at resonates all of us as a lot of us living impeding the home market tearing down what are both in your expectation, hence boy strategic and capital markets activity going forward I think we were very closely with Terry when we think about growth emanate we by one or two small local builders a year. We call it both alone ACT was gorgeous. so what we already doing, Neither enter a new market order, just get bigger and existing market. I don't know when it comes but there is opportunity in this industry for consolidation public debate, There's a lot of builders. His lot of public builders said: there's some large private builders and we overlap a lot in what we do. and it's a lot harder than when regional banks merge or national banks merge. But I think at some point your gun to see more of that, and so I think that's good were accelerate growth for certain companies and so on.
Keep our I something going on now, for always in the conversation as the other products would be, and I been very few large public, the public Mergers and some have succeeded in some have not so I think we need we keep our eye on that, and we expect you to some twenty two to be another robust year, we saw were still early in the year. We ve already had one I feel announced the sector as well as several equity insurances, completed as early staminate certainty, is to be a high level of strategic dialogue between targets and potential of fires. There are, of course, is known and unknown rests like at all this activity, but based on what we are seeing today, we expect it to be another busier talent. Thanks so much for sharing all these insights, we are all going to sit and watch and see what happens with the home market ahead thanks again for joining us today. Thanks also thank you That concludes this episode of exchanges, that woman sacks things for listening and if you enjoyed the show, we hope you subscribe and apple pie
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Transcript generated on 2022-02-11.