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April 20, 2020

Ivy Zelman on Housing

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Ivy Zelman
Ivy Zelman | CEO, Zelman & Associates

Expert analyst Ivy Zelman delivers a presentation on her latest data regarding changes in the housing market and COVID-19. Her in-depth analysis includes reflections on the similarities between the current downturn and the 2008 recession aftermath, with a few key differences. Host Richard Green fields questions on where housing might be headed next.

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Please note this automated transcription may contain errors.

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Richard Green: Today we are delighted to have joining us one of the sharpest analysts of the housing market. I know Ivy Zelman

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Richard Green: I'm sure many of you know Ivy, she is well known for having made bold and correct calls about 14 years ago and proceeding, the global financial crisis.

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Richard Green: She has her own firm IV Zelman and Associates, which again I think some of you probably are clients of hers, and we have done a series on various aspects of the real estate market, but we really haven't touched very deeply on housing yet and so

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Richard Green: We're going to have IV do that for us this afternoon so IV or this morning here in California IV coming to us from Cleveland.

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Richard Green: IV. Thank you very much for being here. And let me just hand it over to you. Oh, and one. I'm sorry IV and one housekeeping item again.

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Richard Green: If you have questions for IV please email them to Lusk center that's Liu SK CT are@usc.edu

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Richard Green: Because of the zoom bombing incident we have turned off the chat function. So if you email those questions, I will pass them along to ivy and acknowledge who the escrow of the question was, so with that ID please take it away.

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Ivy Zelman: Great. Well, good afternoon from Cleveland. It's a fortunately sunny. It was about 32 degrees this morning, it's going to

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Ivy Zelman: Not that I'm a weatherman but weather reports 52 week are two days 52 so you should also be very grateful to be in Southern California.

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Ivy Zelman: So as the title of this deck shows it's definitely a unfortunate new reality in living in a world of this pandemic and what I guess I'd start with is prior to the pandemic starting

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Ivy Zelman: We were pretty optimistic, given the robust pace of housing across the for sale and the new construction or resale market. So it was very strong second half of 19 accelerating into 2020 and we saw across all metrics, just to kick it off.

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Ivy Zelman: Not sure why I'm not moving forward. There we go. Okay, so what we all know is that there's pretty much been statewide or

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Ivy Zelman: Across the country orders to stay in place, with a few exceptions, the good news for the new construction market really all of housing is that it's been deemed essential

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Ivy Zelman: And therefore builders are not only able to continue to build and sell homes, but there are brokers that are able to continue to by appointment only in most cases.

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Ivy Zelman: Sell on the retail side where maybe sellers are more reluctant to have people come through their home so manufacturers everything in the food chain of housing is again deemed essential. So that's the positive or the silver lining in what is clearly a very negative environment.

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Ivy Zelman: Just to give you a glimpse of the amount of, you know, jobless claims in terms of the labor within each of the percentage of

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Ivy Zelman: Each markets labor force. You can see on the left hand side, you know, the markets that have the greatest jobless claims and Florida and Texas at right as of right now.

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Richard Green: I'm sorry I be for some reason your deck is advancing

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Ivy Zelman: It's not moving, you know,

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Not, not

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Ivy Zelman: Hmm.

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Ivy Zelman: I have controlled my screen. So let me just see if I'll have Kim come back on. Sorry, guys.

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Richard Green: Yeah, I'm sorry about this. Everybody, but let's let's

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Ivy Zelman: We do want to see these

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Ivy Zelman: You guys see me okay that part's working. Hey, hey, I can advance my screen on my deck. All right. Kim, the technology expert at Salomon is going getting on the job.

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Ivy Zelman: I was hitting hero. Can you guys see that now.

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Ivy Zelman: Richard. Can you see it.

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Richard Green: I can see your opening slide, but I can't see but

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Ivy Zelman: He can't see it, it says sharing his paws. Bring your shared window to the front.

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Ivy Zelman: Okay, that must be what it was. Okay.

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Ivy Zelman: Hang on.

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Ivy Zelman: All right. All right. Let's see.

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Ivy Zelman: No.

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Ivy Zelman: We're gonna restart it. Hang on. Great.

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Thank you.

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Richard Green: There we go. Beautiful. Thank you very much.

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Ivy Zelman: Now it's not moving with the arrows come

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Ivy Zelman: Alright, so now is moving, guys.

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Ivy Zelman: Richard

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Richard Green: You can see up. Yeah, look, I think. All right, emergency averted. Okay.

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Ivy Zelman: Um, so as we show here. I was starting to say is that we just wanted to show you by market, the severity of jobless claims as a percent of the labor force.

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Ivy Zelman: And you could see that, you know, this is really reflective the prior six weeks I was somewhat surprised to see that Texas and Florida were at the bottom of this list, maybe more, Florida, just giving. It's a more

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Ivy Zelman: You know tourist place in terms of a lot of people coming beach obviously vacations, etc. But nevertheless, you could see here the breakdown

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Ivy Zelman: What we wanted to show you as an analysis that we've done this really just shows you some select markets where we look at what we call high risk markets.

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Ivy Zelman: Not probably, you know, surprising to you guys is that Las Vegas Myrtle Beach Las Vegas, the top of the list. And this is really, including what you'd expect entertainment retail recreation.

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Ivy Zelman: Really accommodation food services and in terms of the top 40 average it's 21% but you could see that like the Inland Empire in your neck of the woods is is making the top

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Ivy Zelman: 10 if you look at the markets with the least risk DC is at the top, thanks to the government spending printing money. Basically, and

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Ivy Zelman: Fort Myers being on this list on the, on the other end of the spectrum. So again, this is sort of taking what we've defined as low risk.

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Ivy Zelman: And government jobs military utilities. These are all essentials. I'd say it as well. That is not reflected in here because it was harder to aggregate, but certainly what I would say would probably be another positive to consider.

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Ivy Zelman: This i thought was helpful to sort of understand, you know, I get a lot of questions about, you know, if unemployment rises to, you know, forecasters are expecting anything from

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Ivy Zelman: Let's say post stay in work or stay in order stay at home orders something north of 10%. And if you look at the fourth quarter of 2009 you can see we pretty much were at 10%

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Ivy Zelman: With the red dots, the squares and the red dots and triangles. What we're trying to show you is that while housing didn't really recover and let's say well look at the first quarter of oh nine.

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Ivy Zelman: That timeframe we really didn't see acceleration from that point. But it wasn't getting worse, even while unemployment was rising and that's the message of this slide. So we're housing likely will bottom prior to the official lagging information on job unemployment rate.

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Ivy Zelman: In terms of our forecasts right now you can see our 2020 forecast for household formation is really plummeted from what we have been running at you know 1.25 plus

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Ivy Zelman: million households being formed. And we expect that this is really just a result of significant job losses as many young adults will stay living at home or even moving back home with their parents. So pretty grim outlook on that.

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Ivy Zelman: That translates to some extent into our housing start forecast lots of numbers on this slide, very busy, but really what I wanted to show you if you drill into

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Ivy Zelman: The, the darkest Gray's multifamily we have that down about 12% compared to single family production down more than 20%

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Ivy Zelman: Now while we have a rebound and single family about a 23% that's really reflective our, our expectation that we have a U.

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Ivy Zelman: U shaped recovery. So we are pretty negative, not only in to Q, but throughout the rest of 2020 but then assume that our second quarter 2021 will start to see the economy growing and resumption of growth and housing that really reflects a much stronger back half and 21

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Ivy Zelman: In terms of vacancy rates. I think it's important to note that based on the centennial census data that the good news and other silver lining

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Ivy Zelman: Is that coming into this pandemic vacancy rates were at pretty much record levels. So that should help I guess with respect to dealing with all the type of great recession impact we have. So that's a good starting point, we'll get to inventory in a little bit as well. Further on

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Ivy Zelman: This is showing our existing home closings forecast. Note that we are down 12% in

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Ivy Zelman: But that reflects very strong first quarter. So if you actually look at the sort of to Q3, the first quarter of 2021 would be down more like 15%

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Ivy Zelman: And I think, keep in mind closings are not necessarily reflective of what we're seeing. And in written business right now, but we think this magnitude is sort of reflective and you could see going back

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Ivy Zelman: To the great recession that it's not too far off of the declines that 15% than what we've witnessed in the Great Recession and and more so negative than we had in prior recessionary periods of 1991 and

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Ivy Zelman: We think it's it's from a modeling pit standpoint, we think we've been pretty negative and in doing so.

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Ivy Zelman: So I think when we look at this chart. You guys are might might be used to looking at inventory or reading about inventories and in a month supply framework.

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Ivy Zelman: Six months is typically viewed as a balanced market of inventory. Anything below six months is really where you see home price inflation above six months you see home price pressure we like to look at

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Ivy Zelman: The ability, instead of looking at a point in time of how sales are doing. We look at inventory divided by households. So we can go back as we show you all the way back to 88 by looking at this as a trend line and what's been a big time foundation of our more

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Ivy Zelman: Bullish view prior to the epidemic was how tight inventories were and we hear a lot about well even prior to the pandemic, you know, are we going to see a pretty ugly housing correction.

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Ivy Zelman: And the answer has been you know obviously depends on the economic outlook. But right now, when you look at this inventory

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Ivy Zelman: Are you guys still over. Okay. You see me because it just got a notation. Something changed. Are you guys good

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Richard Green: You're fine.

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Ivy Zelman: You're fine. I just go. Thanks. Okay. So inventories as a percent of households.

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Ivy Zelman: Currently, have been running at 1.3% which is really what's been driving the robust inflation that we've seen in home prices. Keep in mind.

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Ivy Zelman: With the last two, three weeks inventories with sellers taking homes off the market have really plummeted.

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Ivy Zelman: Even further down estimated right now to be 15 to 20% and this week we get existing home sales and that will really be reflective of what the new inventory numbers are

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Ivy Zelman: So we expect inventories will come back on the market when we're not in shutdown mode but just keep in mind that this is one of the metrics that we've way on really heavily when we're forecasting home prices, which I'll get to in a moment.

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Ivy Zelman: As I said home rises, so

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Ivy Zelman: The numbers for the year are really not reflective of the strength we saw in the first quarter of 2020

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Ivy Zelman: So the year ended at 4.4%. And if you look at one Q. We were running over 5%

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Ivy Zelman: So what we're expecting, just in terms of the cadence is to take a 5% plus or minus plus we'll say a little bit five plus percent first quarter run rate.

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Ivy Zelman: That we had been running at and by year end will be at 3% that feels very bullish right now. We made this forecast and march 25 I'd say

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Ivy Zelman: What what we do have in terms of the cadence is a slightly negative to queue and then and things really accelerating into three and four. Q But not getting back to where we were at the beginning of the year.

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Ivy Zelman: The reason I'm saying it could be too optimistic, even though inventories are so constrained. I'll get to a little more in more detail relates to some recent significant credit tightening that we're seeing in the mortgage market.

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Ivy Zelman: Speaking of the mortgage market.

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Ivy Zelman: If you look here, and I can't see the chart trying to move it over a little bit. The video will keep snapping back but credit tightening we survey.

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Ivy Zelman: Which is one of the really ways that we have differentiated our firm is we have a network approaches 1000 industry C suite executives that are privately held

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Ivy Zelman: That are across every area of the housing market from home building to brokers to mortgage to multi family to building products and we certainly do a lot of surveys and we're very

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Ivy Zelman: diligent and the way we aggregate our information. This is one slide zero to 100 on a scale 100

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Ivy Zelman: You can't get a mortgage zero. You can fog a mirror and I was say that was back in the, the, oh 506 period.

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Ivy Zelman: And 50 is normal. So we've seen a pretty significant spike from where we had been which was pretty much back at that 50 level.

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Ivy Zelman: And that's really a result from the chaos and disruption happening the mortgage market as a result of the government's ridiculously bad decision.

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Ivy Zelman: To basically provide consumers forbearance on their mortgage payments which I say ridiculous because you don't have to prove any hardship.

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Ivy Zelman: So right now the mortgage servicers they have to continue to advance the payment and insurance homeowners insurance taxes everything to the bondholders

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Ivy Zelman: And therefore they're required by law to continue to fund that and as a result of that right now. The Ginnie Mae has created a facility that the servicers can tap into to help them make that those funding.

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Ivy Zelman: Payments but Fannie and Freddie or FHA has not allowed a facility to be created or available to the conventional mortgage market.

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Ivy Zelman: So there's a lot of concern about this as being a liquidity crisis, while at the same time the tightening is resulting from significant spike and unemployment and I'll give you a little bit more details on the flow, the magnitude of the tightening or the, the type of tightening

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Ivy Zelman: Now my my screen. Wanna Dance, why not

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Ivy Zelman: Sorry, guys.

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Richard Green: Trying to get back, let's

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Richard Green: Try and sharing and sharing again that worked last time. Okay.

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Ivy Zelman: Share screen.

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Ivy Zelman: See

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Ivy Zelman: Yep, that work. Thanks. Richard genius. He didn't know you were a technology expert.

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Richard Green: I didn't need

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Ivy Zelman: Okay, so really what the, the lowest risk borrower for FHA and VA are really borrowers below a

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Ivy Zelman: Six 685 go score so lenders have now said they were not are not willing to lend anywhere from below 620, by the way, FHA and VA allow you to go as low as 580

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Ivy Zelman: On your FICO score if you're putting down three and a half percent. So the lenders. The reason I'm showing you these percent bars is to show you the percent

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Ivy Zelman: Of securitized data of loans that are each of these columns. So right now, some lenders won't go anything

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Ivy Zelman: Below six at some are saying 646 60 so you can see. It'd be pretty dramatic if this if these credit overlays are not removed because the magnitude, I can say

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Ivy Zelman: Would be pretty disastrous for the market if we don't see those credit overlays as we get back to work and some stability in the mortgage market. It could be

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Ivy Zelman: Worse than the Great Recession. If we don't see some credit tightening relief. Also on this is on fat on FHA, VA. We haven't seen that on the conventional side of things, but you know the homebuilding market on the entry level side and the resale market is so dependent on on FHA, VA.

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Ivy Zelman: Notice here that it's not just the credit score. It's also debt to income ratios. So if we just pick the middle bars here and we'll focus on FHA

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Ivy Zelman: So what I'm saying is that the number of mortgages that had a debt to income ratio above 45%

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Ivy Zelman: And for those that are not familiar with debt to income ratio. This is really the debt service of all your debt, including mortgage debt.

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Ivy Zelman: So any credit card debt auto loans, whatever you want to add them all up, that's what you have to basically have a metric. And now the lenders are saying if you're above 45

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Ivy Zelman: Then we're not going to lend to you. So they're having multiple credit overlays. And you could see if you're in the 642 660 bucket that's nearly half the bucket and would be a material hit as I, as I mentioned earlier from

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Ivy Zelman: You know the housing market overall

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Ivy Zelman: Just get more into the home builder outlook. What I wanted to show you here pictorial Lee is if we looked at the OH 5208 period we're down about 40%

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Ivy Zelman: And what we're looking for in terms of new order activity in the for the full year of really

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Ivy Zelman: To be down about 25% with the magnitude of that really coming in the second quarter. So if you look

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Ivy Zelman: Sorry. Wait, I'll get there in a moment. This is just to show you the inventory as a percent of households for spec inventory. These are homes that are built without a buyer.

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Ivy Zelman: Is not at record lows by but it's not. It's definitely more in a trend line basis. And we're going to talk about cancellations that we're going to see that are putting inventory back on the market.

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Ivy Zelman: But here's the chart. I wanted to show you. So if you really look at this. This is home building orders sorry home building orders.

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Ivy Zelman: That are going back. And again, looking at the Great Recession and how severe they were we're we're showing you our quarterly progression and then the recovery.

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Ivy Zelman: So where we can be very wrong. And this is if we get back to work and the economy is not growing again in the second quarter of 2021 but we made that assumption and obviously we would see something more negative. If that doesn't come to fruition.

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Ivy Zelman: Home building new orders. So we survey several hundred builders every month and it represents about 15% of New home sales.

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Ivy Zelman: If for the month of March, which really reflected a tale of two halves with the first half being very strong

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Ivy Zelman: And the second half, reflecting the shutdown. We were down about 8% this follow at about 45% increase in February, just to demonstrate the strength of the market.

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Ivy Zelman: And I'd say, right now we're down, probably more like 50% year over year based on our early read into April.

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Ivy Zelman: We're also seeing as you might expect, cancel or cancellation rates are ticking higher I'm surprised that they're not

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Ivy Zelman: Even higher than what you I show reflective again in March, but our April read so far would say that it's not materially higher than what we're seeing.

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Ivy Zelman: A lot of builders are scrubbing their backlogs to make sure that buyers can still be

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Ivy Zelman: Able to get approved and that's one of the biggest risk with the credit tightening that's really been

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Ivy Zelman: Substantial over the last two, three weeks. Same thing with course with brokers that have, you know, deals in escrow that could fall out if they no longer meet the requirements that lenders are demanding.

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Ivy Zelman: Home Improvement and home improvement from our perspective, we had already be the red bars that you're seeing in this chart are really the difference between personal consumer expenditures and home improvement. So through 2018 and

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Ivy Zelman: After many years of Home Improvement gaining at a faster speed in terms of growth, then basically winning and taking share of wallet.

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Ivy Zelman: In 18 and 19 home improvement was actually under performing overall personal consumer expenditures. When we look at that we really just want to point out that it didn't have the same level of momentum that we saw in the new home market and the resale market overall

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Ivy Zelman: I show you this as well, just to look at the home centers which either look at comparisons of different periods and you can see in the great recession that the home centers were down

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Ivy Zelman: On average, that five and a half percent and we we expect that we're going to see comps down in that magnitude again. But overall, home improvement spend

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Ivy Zelman: reflective of the maintenance items you could see that we're only looking for 2.6%

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Ivy Zelman: This would be can compared to big ticket items discretionary items kitchen and bath flooring cabinets things that would be, you know, decisions that can that consumers are

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Ivy Zelman: You know, not apt make if they're concerned about their income in their job.

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Ivy Zelman: I think what we had the benefit of is that we survey over 100 billion dollars of manufacturers and distributors.

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Ivy Zelman: That really keep our hand on the pulse and keep us ahead of the curve. I like to call it boots on the ground and what we're seeing for home improvement for the month of March was only a

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Ivy Zelman: flattish to slightly up 1% growth and all of home improvement. What we have seen, though, is very, very strong categories.

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Ivy Zelman: Again, going, whether we're looking at people are bored, they're staying home they're doing projects there.

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Ivy Zelman: You know, spouses are saying, hey, it's time we do something and they're fixing things up. They're doing a lot of lawn and garden. So if you go into the home centers.

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Ivy Zelman: You would hear a very different perspective on certain categories, but we don't believe the DIY

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Ivy Zelman: Is going to save the overall market. And we also believe when people are back to work. They won't be sitting at home bored and looking for projects to do

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Ivy Zelman: This just shows you point of sale, which is what we're seeing at the home centers. So even with the DIY spending being better than other categories and big ticket. We're still seeing that POS week

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Ivy Zelman: And we expect that it's going to get weaker as we get into a much more sluggish two three que por que going forward.

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Ivy Zelman: Non rest in the survey, again, I mentioned over 100 billion dollars in aggregate revenue, the book ends at that would be 25%

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Ivy Zelman: NEW CONSTRUCTION 25% non Rez with the with a balance in the middle. They have a home improvement but non Rez has definitely seen much negative or negative

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Ivy Zelman: Results and and even though it's only done 1% in March, the commentary from

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Ivy Zelman: The manufacturers and distributors is very, very grim and we're revising our non Rez forecast. We haven't published it yet, but I would say, this could be the weakest area of all of the segments that we follow in terms of construction.

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Ivy Zelman: Raw materials with oil as we know now close to single digits, assuming that we're

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Richard Green: They just fell below zero for the may contract. Oh.

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Ivy Zelman: Well, there you go. That, that's certainly a one silver lining for the manufacturers as input costs are are down and we're using this scale of zero to 100 100

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Ivy Zelman: Obviously the the strongest and and zero going down, but we're looking at right now that being a added positive and there's not many positives, but raw materials being one of them.

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Ivy Zelman: Hiring we ask our survey respondents to talk about hiring you could see that march. This is not reflective again.

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Ivy Zelman: It's a first half. That was more optimistic but still never lost was down considerably. So I think with the small business.

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Ivy Zelman: You know SBA loans. Basically, you can't let go of employees or there's some limitations on how much you can reduce your payroll by if you don't, if you want those loans to be forgiven.

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Ivy Zelman: So we may see some stabilization at these lower levels because of that.

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Ivy Zelman: But certainly very disconcerting. When you, when you look at it and I'm going to wrap up it multifamily and then we'll go to Q AMP a multi family. If you look at these

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Ivy Zelman: Various sub sections of this chart. What I really want you to focus on is more on the right hand side of what I would call

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Ivy Zelman: Backlog the number of units that were under construction. And when this pandemic hit. We're at multi decade highs.

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Ivy Zelman: And a lot of it had to do with, you know, the municipalities that were already constraint labor constraints more urban high rise to take longer to get built

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Ivy Zelman: Constraints around inspectors lots of issues that why this backlog was not being delivered faster. But as you can imagine, everything, especially in urban cities like New York City has been now pretty much shut down.

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Ivy Zelman: And that's going to result in a near term completions will be a relief to landlords, that won't see that pressure, but once you start to see resumption of growth.

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Ivy Zelman: In a economy that's clearly going to have very, very high unemployment, you're going to have also a supply issue as more supply will be hitting the market.

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Ivy Zelman: Just to show you on our apartment survey that we do. We surveyed over one and a half million apartment units.

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Ivy Zelman: In March, again, this is really reflective of still strong renewals and the first half. We saw overall blended revenue growth at 1.7% and we expect a pretty ugly back half of 2020 but even worse than 2021 with the expectation that will see

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Ivy Zelman: High single digit growth declines in overall revenue growth and that's really reflective of the fact that, you know, pushing renewals again with more supply and 21 is going to be that much more challenging.

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Ivy Zelman: This is a very difficult chart, probably for you to absorb. But we wanted to quadrant where we're seeing a weakness. That's deteriorating further in the bottom left hand quadrant.

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Ivy Zelman: You wouldn't be surprised that you see Las Vegas and Louisiana on there, you've got, you know, the Inland Empire and the Bay Area, the

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Ivy Zelman: Bay Area, I should say in general has been struck been weaker than Southern Cal for you guys obviously care about Southern California.

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Ivy Zelman: And up in the left hand corner Seattle. One interesting thing. And this is, again, just looking at rental. This is not for sale.

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Ivy Zelman: is improving, but still week. So just something to look out, we wanted to show you that strong but deteriorating is the bulk of the markets.

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Ivy Zelman: And I think that's it for us. I know it was quick and a lot to absorb but hopefully we'll have a lot more with Q AMP. A that I can address that you guys care about

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Richard Green: So before, I'm going to, I'm going to ask two questions, and then I'll turn it over. But again, if you have a question for IV please email it to Lusk CT are@usc.edu that's Liu SK CT are@usc.edu edu.

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Richard Green: And then robot will feed me the questions and I will ask them, acknowledging who asked them, but I wanted to just touch on a couple of things IV. First of all, just back to the issue of servicers um

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Richard Green: And you argue it was a bad idea to

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Richard Green: Make forbearance. So wholesale. I'm actually less worried about

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Richard Green: Moral hazard, because I think most people understand that they're going to have to pay it back. Eventually, and they don't want to put any more pressure on themselves than they need to. But we'll, we'll see how that shakes out.

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Richard Green: But I if you could pull the lever right now, what would you do what facility would, would you make available to servicers and if you could talk a little bit about the implication of what happens if they fail. Uh, I think that would be very helpful. Okay.

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Ivy Zelman: So I think FHA should provide a facility for conventional

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Ivy Zelman: Mortgages currently. It doesn't exist. His view has been that

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Ivy Zelman: You know the number of people that are being Mark collaborators.

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Ivy Zelman: Correct. I'm

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Ivy Zelman: Sorry, if you look at what the view is, is that, you know, there won't be that many people that will go into forbearance and I think they have an estimate. That's

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Ivy Zelman: Somewhere in the magnitude of one and a half percent but as I just said that we have five and a half percent already that are

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Ivy Zelman: Not making the mortgage payments and we expect that number will only increase. So I think they should that the FHA should provide a facility.

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Ivy Zelman: The non banks didn't do anything wrong. They weren't the cause of the pandemic and they really have had gained tremendous share

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Ivy Zelman: From the trough of the recession, where they represented less than 20% of the market non banks today represent more than

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Ivy Zelman: 50% of all originations. And if you look at FHA da they're originating nearly 90% of those mortgages. So, you know, those

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Ivy Zelman: Those companies that are non banks don't have the ability to have the Federal Reserve backing them. They don't have depositor

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Ivy Zelman: Funds, they're, they're really in a liquidity contract now. So I think that the magnitude of it as Christie Bercow

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Ivy Zelman: Who is the vice chairman of the NBA did a call from my clients and for our industry executives and she said it would be a catastrophe to let these companies fail.

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Ivy Zelman: And Mark Calabria is basically saying, in his opinion, if there are weaker companies in the market than they should fail. So there is a complete disconnect Richard on the view that the mortgage industry has and they've been screaming loudly about it, versus Mark Calabria

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Richard Green: Well, and what's striking is this is not about people having bad businesses, they were ordered by

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Richard Green: Fannie and Freddie to do forbearance and again just to explain the mechanism is they're not getting any cash flow.

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Richard Green: And yet they need to Ford advanced the cash flow to the investors in the mortgage backed securities.

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Richard Green: Ultimately, if these mortgage fails mortgages fail they get paid back with interest. But nevertheless, in the meantime, they don't have any liquidity.

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Richard Green: From what I can tell their lines of credit if they hadn't taken them down already are not available to them. And so, you know, I, what I worry about is

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Richard Green: If all of these guys go away the capacity. I mean, we're already seeing limited capacity and mortgage origination. That has to be one of the reasons you're seeing just tightening at the moment.

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Richard Green: So if you

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Ivy Zelman: Just add though. So keep in mind that the banks weren't really in any earnest way willing to lend to the weaker credits. So the government's

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Ivy Zelman: You know mandate to provide you know with taxpayer money access for lower income borrowers, the ability to pursue the American dream. And basically, the government right now is going to shut out

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Ivy Zelman: Those borrowers. Because if FHA FHA and VA are dependent on just the banks, as we know, very large banks are not willing to do those lower Michael borrowers and higher debt to income ratio. So it's really, you know, part of what this this government supposed to be willing to do so.

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Ivy Zelman: There's, you know, complete, we're all startled by the decisions that the government's made on this front as relates to liquidity for those non banks.

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Richard Green: Yeah, I mean, I've known mark a long time. And so I'm not entirely startled. He believes what he believes

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Ivy Zelman: Treasure what could happen and and actually provide the facility. So the new chin is not also budging on this so they don't have to be dependent on eBay that

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Richard Green: That, that's it. But FH FHA would be the natural

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Richard Green: Right place. Can I ask you to just back up here slide on read the strength of that that one. Yeah.

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Richard Green: Revenue growth for our word one

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Richard Green: The one with the cities and pressing part when I just can't help it out what's happening in Baltimore in Philadelphia.

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Ivy Zelman: Um, well, if you look at those markets there, you know, much less

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Ivy Zelman: I think dependent on the suburban exposures and they're more government, probably, to some extent, I'd have to dig in. But that you know they don't have this similar

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Ivy Zelman: Competition across the new construction market Baltimore does, but the new construction market, especially for people that are

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Ivy Zelman: Racing out of apartments that might want to live suburbia in suburbia. We've heard that from builders, I asked builders.

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Ivy Zelman: Who's buying right now. I don't understand it. So we think about affordability as being a constraint in New York City. When you live in, you know,

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Ivy Zelman: High Rise there. It's very difficult to not only, you know, find a home that that's not going to kill your commute is it kill you. On a commute.

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Ivy Zelman: But to afford it. So I'm just thinking that maybe that's less competition from giving it more mature markets, but I can get back with you, Richard on that one.

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Okay.

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Richard Green: So we have a question. And again, let me repeat. If you have a question, please email them to Liu SK ctr@usc.edu

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Richard Green: We have a question from James Torres asking for you do a quick back of the envelope case study midsize and I'm guessing there's a reason

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Richard Green: James's picking this example a mid size 42 residential condo and to 20,000 square foot retail office mixed use project.

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Richard Green: Construction began in 2021 in Orange County two blocks from the ocean. What is the likely value drop with the result. The coronavirus zero 10% 25% etc. So he's he's really putting you on the spot.

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Ivy Zelman: Well, I have a very hard time answering that, and it'd be incredible. And my response, especially as we don't

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Ivy Zelman: Analyze the retail market, I would say that, in general, I would be very concerned about retail just what I know from my my local channel checks here talking to business owners, but I, I would lean more than on the

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Ivy Zelman: More negative of those scenarios and the positive

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Ivy Zelman: Sorry, James.

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Richard Green: Yeah, so, um, I can't imagine I'm wondering if they're just coming through. Do we have any other questions for it.

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Richard Green: Let me ask you this, about homebuilding liquidity homebuilder liquidity. So as you discuss there is

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Richard Green: At least because homebuilding is considered a central

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Richard Green: They're allowed to continue to build. But I guess the first question is, is, is a physical one is given that they have to maintain social distancing while doing the construction. Does that slow down the construction process, and if so, by how much and I'll have a follow up to that.

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Ivy Zelman: Excuse me, we asked that question on our we have been asking a question on our surveys and there is really a smaller percent than you would expect.

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Ivy Zelman: I'm going to say it's less than 20% that are seeing any major disruption. We are definitely concerned about the

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Ivy Zelman: Overall building products that will be needed for example, Mexico, just shut down their borders and facilities in

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Ivy Zelman: Certain of our cabinet manufacturers publicly traded companies to have them have their operations in Mexico, and now they won't be able to get their cabinets and we here domestically.

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Ivy Zelman: Flooring companies are saying shutdowns in certain states like Pennsylvania is completely shut down. So it's not housing isn't deemed as essential there.

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Ivy Zelman: So I think right now. It's a little early, because those are later stage products that don't go into the home until they're ready to

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Ivy Zelman: You know, get close to finalizing and closing with the consumer, but I would say that right now. I'm surprised on how little we're hearing that there is disruption.

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Ivy Zelman: Or major disruption, but I expect there will be more as we get further and in keeping my word such low numbers right the builders are trying to work through their backlogs

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Ivy Zelman: But I think that, you know, we're expecting closings will be pretty negatively impact as as we're seeing orders to

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Richard Green: And so again, this is suitable for the distinction between liquidity insolvency, you have good companies that have demand for their products. But if they go a period of time without revenue, particularly if they have debt that they have to pay back

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Richard Green: That could be an issue for them use, how much of a threat used to just liquidity, per se, being in the construction side of the market. So

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Ivy Zelman: We're talking to the public builders. We currently based on what we've modeled really don't see illiquidity concerned, we do have a downside case.

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Ivy Zelman: That we use to value our companies as compared to the base case we're using and the upside case that we also have in the downside case we have a definitely a much more

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Ivy Zelman: negative outcome and several companies don't survive on the private side right now the private builders that actually got their SBA loans.

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Ivy Zelman: And those that don't have access to public debt, they're unable to continue as they so much bank other so much dependent on banks.

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Ivy Zelman: I was happy to hear one builder. Just an example who builds about 1500 homes in Florida, with the exception of Miami throughout the state.

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Ivy Zelman: And he was telling me that maybe this time of year. They're usually selling 25 to 30 houses a week. And even though they're operating with their communities, open

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Ivy Zelman: It's pretty much almost by appointment only there's not a lot of traffic to the communities traffic's pretty much as you imagine come to us complete standstill.

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Ivy Zelman: But he said that, you know, I was shocked. Last week we wrote 11 contracts and I was just, you know, completely

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Ivy Zelman: Shocked to and I said, so what about your backlog with all of the credit tightening we're seeing how much of your backlog is at risk.

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Ivy Zelman: And he said, well, good question. We just scrubbed it and right now it's 23.5% of our backlog won't get approved unless we find lenders that are willing

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Ivy Zelman: To provide you know more favorable credit and it's kind of like whack a mole. They're moving from, you know, non banks to banks and regional banks that are willing community banks that are still willing or credit unions, even

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Ivy Zelman: But the reason I bring the story up is, I said, well, let's just say all of that backlog is now spec inventory. Again, it's basically, you don't have a buyer for this you know construction that you've started

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Ivy Zelman: Will you start dumping that and just cutting price to move the inventory to create liquidity.

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Ivy Zelman: And his answer was, well, I got my SBA loan. So I got $10 million. So I don't know. I won't, because it's a $200,000 plus or minus price point.

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Ivy Zelman: And the market is so incredibly constraint. So I think the reason I bring it up is the SBA loans have really given these builders a fighting chance of surviving

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Ivy Zelman: And I know there's lots of brokers as well and and ones that were interacting with the manufacturing side. Is that the same thing.

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Richard Green: So that's what are you hearing about the process of it and it's likely the Congress is going to pass another round of business phone so the next little story in the paper today suggested this week. What is the process. What are you hearing about the process for obtaining those loans.

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Ivy Zelman: In terms of them having to pay it back.

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Richard Green: No, no, no. In terms of in the process of applying and for them, getting them. Have you had builders who've had difficulty getting access and others have found it pretty easy. If so, who are the people for whom it's easy. And who are the people for whom it's harder.

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Ivy Zelman: Well, we got an SBA loan so I can just tell you from my personal experience, although certainly wasn't big enough, in my opinion, but

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Ivy Zelman: The reality is, is that if you don't have a strong relationship with your bank that's a negative to start

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Ivy Zelman: And I know I've talked with some of my builders and also some real estate brokers that literally just got funded today being what is today, what day of the week, we're in right now today.

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Ivy Zelman: Yeah, thank you. Monday say

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Richard Green: Every day is there now.

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Ivy Zelman: But, but literally got funded late last week before the money got ran out. They had applied, you know, a week or two prior but only got funded

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Ivy Zelman: Late last week and you know they were just, you know, on their knees, thank God that they got the money because they wouldn't have survived without it. And I think that there's many companies that have been

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Ivy Zelman: Dealing with their bankers and working till you know late hours of the night to make sure that everything's been properly, you know, applications have been filled out properly. So it's been pretty hairy, from what I hear.

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Richard Green: So a question from Catherine Williams, as she notes that Richmond is at the bottom of the chart.

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Richard Green: Should the second and third tier markets, take a bigger hit and be much longer to come back then larger cities and are these good markets for smaller investors to look for deals

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Ivy Zelman: You know, I'd say that part of why the you know Richmond's at the bottom of the chart is my guess is just from, you know, not only more competition and you know the suburban market again experiencing more buyers.

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Ivy Zelman: That are benefiting from low rates are the ability to purchase today.

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Ivy Zelman: But I, I can't really say without looking at again marrying this with where as jobless claims as a percent of labor force, you know, not one metric to give you a good answer.

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Ivy Zelman: So I would just say that I feel like what we just downgraded one of our apartment rates are several actually to sell. So we have several sell ratings on publicly traded apartment reads

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Ivy Zelman: Because not only have you know the renters that are going into forbearance are not paying their rent, but more because of

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Ivy Zelman: The fact that they're in, maybe more, the class B type market where they've got consumers that are lower income that are going to see, you know, probably more outside pressure

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Ivy Zelman: And therefore, we were more cautious on them and also the the supply coming in those markets.

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Ivy Zelman: Because there's not been the same urban shutdown is more severe. And lastly, again, the homebuilding market is going to be a bigger competitive threat to them, assuming they have the credit to get approved.

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Richard Green: So I'm going to combine questions from Paris Silva, and Michael Tesler

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Richard Green: So parish is asking about the migration from California to largely Arizona and Michael is asking about suburbanization and maybe even rural

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Richard Green: Places. Is this going to be, it's a slightly different version of the previous question, but will this lead to more migration away from larger cities to smaller places and

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Richard Green: Paris specifically wants to know what you think about the future of Phoenix as we go through this and

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Richard Green: Come out of this, and it just what I'd like to have what AS, AS I KNOW YOU'RE IN NEW YORK good part of the time. Does a city that relies on subways and elevators have a harder time coming back than other places.

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Ivy Zelman: No, I think that our view. I'm just pulling up. I wanted to look at the jobless claims numbers and the weakest and the strongest markets in terms of job growth.

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Ivy Zelman: So I think this, this is the important slide that we should be looking at where the highest risk jobs or or the highest risk markets in terms of the ones with the most high risk jobs.

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Ivy Zelman: You know, with respect to urban or, you know, the flight to the urban core during the post Great Recession recovery period, you know, there was the demise of the suburb life and suburbs and homeownership rates were going to plummet some very prominent

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Ivy Zelman: Investors and executives were saying that homeownership rates we get to 50% and ever happen homeownership rates have been on back on an upward climb.

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Ivy Zelman: I think that this will this will accelerate homeownership. I do think that people living in high rise apartments, one of my employees that lives in Chicago with his new wife.

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Ivy Zelman: they've now been an apartment building for six months, living together and they both indicated that they want to now finally move out to the burbs which they wouldn't have if it hadn't been for this pandemic.

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Ivy Zelman: And I think that, you know, it probably changes social behavior on the margin for people that were either thinking I'm going to start a family.

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Ivy Zelman: You know, I recently got married. We don't have kids yet, but eventually we're going to move to the burbs it probably just accelerates that decision to move sooner.

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Ivy Zelman: But as I mentioned, it's very much contingent on available inventory and your ability to afford product. So I think some markets will, like I said, the stocks that we downgraded like Camden and mid America.

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Ivy Zelman: UD are they have a lot more rentals in the in the sort of suburban area. But I would say that the urban multifamily guys that are in New York City, or even the Bay Area where it's very expensive to find

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Ivy Zelman: Homes that you can afford to buy. I would be less likely to see that flight to the suburbs. They just don't have anywhere to go. There's a real affordability issue. So we do think some social behavior, but I don't know that it's going to be a sea change, but I think it's going to be incremental

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Richard Green: Just we had a comment from James can who has two projects under construction. Your Seattle.

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Richard Green: He says they've been candidates construction slow down at each site by about 50% adding two months to the schedule due to one social distances.

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Richard Green: Distancing any other, and this is something I've heard from from a number of people city staff for Lowes, which means you can't get an inspector out there in order to have the project along to the next level.

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Ivy Zelman: The inspections. It's interesting, but, you know, we've heard from builders again who need inspections that they have. And again, seeing that much disruption.

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Ivy Zelman: It may be different in, you know, the downtown areas. Again, more commercial real estate, which has had, as I mentioned, my non Rez feedback has been the most negative of all feedback across our entire housing. Housing mosaic.

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Ivy Zelman: But certainly, it's not that surprising if the urban cities are seeing more of a delay there than let's say the suburban markets where it might be easier and less of an issue to go to a high rise or, you know, building where social distancing. It's much harder.

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Richard Green: Okay, before I move on to the next question. I just want to know, one more time. If you have a question for ivy please email us at Lusk ctr@usc.edu that's Liu SK ctr@usc.edu I'm from Brian

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Ivy Zelman: I was just going to point out one thing that was really interesting. We just saw

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Ivy Zelman: Overall, you know, pending contracts Redfin just put out there, based in Seattle that pending through the first few weeks of April, these are you know new written contracts are down about 54% right now.

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Ivy Zelman: Based on the latest week

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Ivy Zelman: But interestingly in Seattle. There's been very positive.

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Ivy Zelman: Articles of light that we've seen that we get through Google alerts that showing that multiple bids on on homes that come available at that lower price point, which was

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Ivy Zelman: Somewhat shocking. I thought, given that that's where this whole pandemic started but the markets been stable to improving, but that just shows you the resiliency of the market.

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Richard Green: Well, and it helps probably that Amazon is there.

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Ivy Zelman: Right. The jobs right. Go back to jobs.

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Richard Green: Yeah yeah yeah I'm low Boeing may be, this may be problematic for Boeing for a while I'm question for Brian Lee. He wants you

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Richard Green: To know specifically what you think about the San Francisco Bay Area and La residential market in terms of values for single family homes and apartments and he say about resales

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Richard Green: Will they go into a downturn and when will they rebound. What are some key metrics that you're looking for it in these markets. I mean, you've already talked about jobs drop shops, that's, that's pretty clear. But if you could comment a little bit on those two markets and valuation.

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Ivy Zelman: Sure, I mean in terms of the resale market, the Bay Area, which has very little new construction, at least in single family.

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Ivy Zelman: Has been an area that's been hit harder right now then, let's say la and Southern California.

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Ivy Zelman: But we think that just there have been more stringent on the shutdown orders than Southern California, but we are seeing deterioration. Now in Southern California starting to accelerate

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Ivy Zelman: It's really tough to say on values because the inventory that I mentioned, which is the metric that we really wait heavily

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Ivy Zelman: On on how much inventory in the market starts to come back on. Once we're no longer stay in place, but we do see certain markets that are even more rest than LA or San, let's say, San Francisco, like Euston

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Ivy Zelman: That is the double whammy of not only you know the pandemic, but we're oil prices are and could expect to see negative home prices there. I think it's a little early to tell right now.

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Ivy Zelman: Because of the again going back to appreciating How resilient are the buyers in the market because foreign buyers have been such a driver in the Bay Area and Orange County.

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Ivy Zelman: I think there's going to be probably as seemingly we're allowing foreign buyers to continue the buy in and there's demand, even though there's such a global

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Ivy Zelman: Downturn that we're experiencing. I'd say you can argues that a positive or negative. Right now, when I look at pending only down

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Ivy Zelman: 54% I say only I'm really surprised that a lot of the brokerage are saying we have foreign buyers that never need to tour homes to begin with.

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Ivy Zelman: That are that are writing contracts and a disproportional level. So, I wish I can give you an explicit value because we're on a forecast basis.

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Ivy Zelman: It's difficult, where we're just getting a national court case right now, we're not going into market specifics

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Ivy Zelman: Fast forward 90 days, you might have a much better way of of extrapolating what we're learning from all of our surveys, I would be more concerned, just about.

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Ivy Zelman: The Bay Area than I would Southern Cal, just because I know how strong the market has been in the

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Ivy Zelman: Suburban markets prior to the pandemic and the strength was really across all price points, even the higher end which had been week was starting to show the acceleration after being weak throughout most of 18 and early 19

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Richard Green: So a really excellent question from Howard five. How do you expect the mortgage forbearance to affect the mortgage insurance industry.

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Ivy Zelman: You know, we cover the mortgage ensures and right now the mortgage insurers don't have

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Ivy Zelman: You know claims, if, if the mortgage goes into forbearance. So for them, it's actually not a cost for them. They're not in the liquidity.

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Ivy Zelman: Crunch. At this point, the volume of mortgages obviously on reef eyes have been very positive.

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Ivy Zelman: And that does hurt them on their insurance enforced from consistencies as we start to see

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Ivy Zelman: People refining it takes them out of the insurance and force, but the volume, therefore, is a negative to them on revise and purchase volume is been

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Ivy Zelman: You know, obviously negatively impacted by the pandemic, but we think that the stocks were there. So where they're trading right now.

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Ivy Zelman: Are really just silly and stupid have gotten way oversold. They through the regular the regulation of P Myers, they have more than ample capital.

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Ivy Zelman: And we we look at those boxes sort of just jaw dropping on how cheap they've gotten. But I think that the capital position liquidity is much better than the markets expecting. So we're bullish on those stocks.

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Richard Green: Great, thank you. Ivy. Well, we're coming up towards the top of the hour. So we don't like to keep you any longer IV. Do you have any final words of wisdom that you would like to share with the group before we adjourn for the afternoon, in your case, morning and hours.

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Ivy Zelman: I just, I feel like with where we are right now at stay at home. It's really tough to know how, you know, consumers will behave

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Ivy Zelman: But I think the housing market is going to be more resilient and could wind up being, you know, one of the brighter spots. I'd like to call it.

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Ivy Zelman: A tall midget given you know that housing has, you know, from people nesting at home, they're realizing their spaces too small or they want something new. I'm more optimistic. I'm worried about the credit, though, that that's where I'm the

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Ivy Zelman: Most concerned.

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Ivy Zelman: And thinking that it could really stall, what would have been a much stronger type of rebound. But I do think that there's a resiliency and just

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Ivy Zelman: Talking to builders and how many people are coming out or doing by appointment only I'm surprised by that, given what's going on. I certainly wouldn't be buying a house right now. So that, that's my wisdom.

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Ivy Zelman: That will see a more resilient housing market. But thank you so much for having me, Richard.

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Richard Green: IV. Thank you so much. It's always a pleasure always very densely packed hour with you. I think we always learn a lot in a short amount of time.

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Richard Green: Really appreciate it. Your indexes. By the way, are just great. Very helpful very clear.

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Richard Green: Just for the crowd. The next price, excuse me less perspectives talk will be this coming Wednesday at 9am and that's because again we're going to have East Coast people

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Richard Green: On the call vulnerabilities of the mortgage system. And again, featuring my good friends at Golding for my key formerly the FHA Commissioner Ted Tozer on now with Milken Institute formerly the president of Ginnie Mae and Lori Goodman.

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Richard Green: Who runs the mortgage policy research project at the Urban Institute. I think it'll be a great morning all three of them are very insightful knowledgeable people and I'm looking forward to seeing them ivy. Once again, thank you so much for joining us this

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Morning.

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Richard Green: And

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Ivy Zelman: The questions better but

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Still

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Richard Green: A better person.

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Ivy Zelman: I said, Sorry I couldn't answer the questions more. I couldn't be more helpful on

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Richard Green: So,

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Richard Green: You were, you were very helpful.

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Richard Green: So thank you very much.

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Richard Green: Alright, see you see us. Some of you on Wednesday.

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