Financing Perspectives: What’s Changed, What’s Here to Stay

Please note this automated transcription may contain errors.

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Richard Green: So good morning, everyone. My name is Richard green I'm director of the USC Lusk Center for Real Estate and it's my pleasure to welcome you to what I believe is the 22nd installment of lusk perspectives. We have a particularly timely talk today.

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Richard Green: It involves housing and I think it's fair to say one of the pleasant surprises of the last four months or so is that hasn't has not done as badly as a lot of us thought it was going to do and to shed a lot of light on that we have a particularly appropriate person Bird Anderson.

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Richard Green: Bird runs a home builder lending for Wells Fargo and he's coming to us today from Charlotte.

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Richard Green: Bird is I think someone who you would call a lifer. He has been I looked it up at Wells Fargo for 35 years

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Richard Green: Um, I guess what I can say is, I've been married for 35 years. So, and that's gone very quickly. So I imagine it's gone.

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Richard Green: Quickly for you to sense like it's been a good professional marriage.

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Richard Green: Um, and I've gotten to see his slides in advance and they're, they're really on target for the sorts of things that I know I'm worrying about right now. And I think that will be true.

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Richard Green: For all of you. So again, thank you very much for joining us again, just some housekeeping. If you have a question for bird please type it into the Q AMP a box at the bottom of your screen. And I will

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Richard Green: Be the concierge of your questions after bird finishes with his presentation a bird Anderson. Thank you for being here. And please take it away.

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Bird Anderson: Well, thank you very much, Richard. It's delightful to be here. We've shared probably a stage or two at a ULI meeting or a home builder industry event of some sort. But it's a treat to be your guest as a as a virtual

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Bird Anderson: Colleague or partner and Scott Laurie from the Olsen company curse. His name or four. God bless him whichever it tends to be HE. I think nominated me for this. We've had a good relationship with that company for many, many years.

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Bird Anderson: And I also want to know. Amanda Thompson is with us today. She's a young banking colleague of mine here in Charlotte, who helps me

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Bird Anderson: With a lot of special projects like this. In addition to being a really sound banker and relationship manager in her day job, so I will, I will get after what I've got. And then we'll, we'll save plenty of time.

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Bird Anderson: To to get any questions you have, or or your, your guests that are part of the the perspectives team there.

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Bird Anderson: So what you and I talked. I don't know month six weeks ago and we sort of came up with this agenda, which was what has happened, what looking backwards. What were the builders doing then and what are they doing now.

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Bird Anderson: Why do we think housing has, in fact, I wouldn't say survived. I would say thrived would have said survived in late April into early May. But since since early in the day. I wouldn't say survived, I would say.

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Bird Anderson: thrived will get some commentary from from builders in our portfolio. I'll give you a perspective of what banks are doing from one bank's perspective, not, not from

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Bird Anderson: A survey of other bankers or anything like that, but just a sense of what we see in the market. And what we're doing and then take a shot at what we think of

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Bird Anderson: In terms of what banks are doing the same or differently and what builders are doing the same or differently. What do we think is sort of

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Bird Anderson: Temporary what's what's probably going to stick around. Well, like I said, we'll do that in quick enough time that if there are any questions we should have plenty of time for that.

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Bird Anderson: I wouldn't have but just before I jumped into it. Um, I know you've had economists, I know you've had john burns and you've had statisticians and policy professionals.

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Bird Anderson: The perspectives. I'm going to share with you today are going to be well there is some survey material it is much more trend theme commentary

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Bird Anderson: Versus a statistically correct survey that was emailed monthly or weekly out and and compiled and and scraped and scrapped from a

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Bird Anderson: Statistical perspective in the manner and economists would or statistician with doing these these again would be more observation oriented that we do have some some data as well.

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Bird Anderson: Just as a brief shot of what we do. We have a home builder banking group within the commercial real estate at Wells Fargo, it's, it's our purpose to

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Bird Anderson: lend money, but in addition to lending money to add value as a lender by having a real understanding of the industry and proper structuring and advantageous structuring for any given deal or profile of a customer and then to really interact closely with our

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Bird Anderson: Partners all over the banks to make sure we're bringing the appropriate insights or products or whatever to anybody. So that's what we do. That's, that's who we are.

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Bird Anderson: It's really a middle market and large builder business. So if you, if you look at the Hanley wood or or professional builder builder 100 or building giants or

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Bird Anderson: Top 100 or 200 that tends to be our client base in addition to the large national public companies, there are regional private and and larger companies.

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Bird Anderson: That say the smallest builder in our portfolio probably does a couple hundred houses a year. And then, you know, Dr. Horton and l&r customers. So we've sort of run from 200 to 60,000

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Bird Anderson: We tried to get a good sample of just some profile names. You may recognize with a heavy emphasis on the ones that are based out there in California.

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Richard Green: Is there a particular reason why the awesome company is the first company have listed on your side.

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Bird Anderson: I don't know. I think we put that in a random drawing like they do for the NBA Draft

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Richard Green: I think

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Bird Anderson: Now that's that's a hat tip to Scott again for

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Bird Anderson: Making the your, your guinea pig today. So no, we, in all seriousness, we have such a great basket of customers and these are, again, there are a few that

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Bird Anderson: Are California builders that we don't have their permission formally. To do this, but so we hadn't put it up there but

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Bird Anderson: Yeah, it's just a really nice business that the builders that are active. Today we're survivors of the Great Recession with a you know 70 or 80% drop in volume with a 30 or 40% drop in price. And if you're an industry or businesses survive that you're you're resilient.

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Bird Anderson: So looking backward what what happened, sort of the last several months before we got into June and July I would know.

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Bird Anderson: We came in and such a strong place we came into code that I had a number of builders say things like the spring sales season started January 1 to December 26 and those kind of things. So backlogs were really, really good coming into into the sort of early to mid March Kovac crisis era.

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Bird Anderson: It was a booming, January, February.

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Bird Anderson: And then mid March, it really just pivoted and it dropped 20 depending on where you are sort of 20 to 40% we were sampling every week, then it went down 20 to 40% every week so that that mid April, roughly speaking, our customers were at 20% of their prior year pace down 80%

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Bird Anderson: So it kind of just, just take straight down. It didn't drop down. Although for week. That's a pretty big drop. But we did see it, week to week

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Bird Anderson: And then it just sort of made the same pivot right back up starting in mid April.

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Bird Anderson: Sort of almost at the same pace just climbed right back up to then may

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Bird Anderson: Which was not as good as June, but it was a very good month with a lot of builders, the majority in our portfolio that we sampled were up year over year in May.

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Bird Anderson: And notably up

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Bird Anderson: The best performing segments and markets seem to be entry level or lower price first move up suburban X urban smaller markets tertiary markets lower prices.

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Bird Anderson: From a segment sort of profile perspective. Not that larger cities were not performing well they were, but it was the suburbs and the excerpts of those larger cities and then the southeast in Texas through May, and particularly really seem to stand out as our performers

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Bird Anderson: The obvious markets that were under performers were higher end things. Some second home things

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Bird Anderson: Some resorting things

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Bird Anderson: Active adult. The, the older the older potential buyers were less quick to come back out and travel

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Bird Anderson: Coastal markets California markets will slower and then obviously the shutdown market, wherever that would have been where for a longer period of time. They said housing is not a protective

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Bird Anderson: Critical industry. And so you can't build well obviously on Long Island, New York or Seattle, Washington. If you can't build that was slower to to turn

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Bird Anderson: So what about June so john Byrne, so I know you've had as a speaker before who's great industry guru that we respect very, very much said that on

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Bird Anderson: His survey suggested sales were up 55% year over year in June, and I don't know where in the get world he gets that data that's simply wrong the writing center. If you look in the bottom there is 57%

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Bird Anderson: I was actually gratified to see that number because when i when i when i was making this deck and saying, I'm really going to go show

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Bird Anderson: In a recorded room full of people that are survey said fit sales year over year up 57%

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Bird Anderson: That's got to be I've got to have done something wrong. So I left it in there yesterday when burns came out with 55 was good to see. We were aligned our survey, just to give a perspective that we did in some

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Bird Anderson: Some detail at the first week in July. It was 37 builders that represented 40,000 over 40,000 closings last year so average

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Bird Anderson: 11 1200 sack 11 or 1200 units was an average builder, I would notice I did at the top of the call. This was not done, statistically, with the help of our economics department or

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Bird Anderson: Math and it guys. It was really it's not statistically correct because we're overweight in

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Bird Anderson: And sort of the southeast and California and Texas and Mid Atlantic to and we're definitely under sampled

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Bird Anderson: In the Rocky Mountains Pacific Northwest.

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Bird Anderson: To lesser extent, the west and north east Mid Atlantic is misplaced there. We actually do have a good representative sample. And then in the mid Atlantic region.

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Bird Anderson: Anytime you're dealing with smaller builders.

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Bird Anderson: You know, they can have big jumps or or drops because just one or two more or less communities are open one year to the next. These is not a same store sampling and then builders themselves report net and gross sales differently and drop things or move them to a

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Bird Anderson: To a cancellation at a different pace and reason.

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Bird Anderson: But nevertheless, we think it's directionally a good, a good thing to see. So, June 34 out of 37 builders were up year over a year.

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Bird Anderson: I can't see my graph on the far right side because of our pictures but those boxes show you the March, April, May and June, the box is the

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Bird Anderson: Is the 50% percentile. And then the line graph is the 75th high love and then the dots that are way above or way below or were deemed statistically insignificant for that month for some reason or another, so far outside

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Bird Anderson: But anyway, the bottom line is it's thriving as of June.

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Bird Anderson: It's not just surviving and there was a precipitous decline for four or five weeks in a row, mid March mid April that pivoted back in May, that is now at least for one month was quite stable in the first two weeks of July, you're very strong

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Bird Anderson: Alright so what what are the builders telling us in this June survey, clearly there's a confidence in a comfort and a shift from a it's pivoted where's the the infill

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Bird Anderson: Urban serve then higher density was where all the action was it had begin moving a bit that had lost some cachet as people needed more affordable things in one movie now that accelerated here over the last four months.

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Bird Anderson: There are not many cancellations. They were some for sure that Scott noted a couple of months ago in in the mid March mid April. That was offsetting any sales to speak of.

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Bird Anderson: That has changed. Notable builders many builders in their comments say the people that are making an appointment online or scheduling a virtual tour in this sort of thing. Those that's a real buyer. That's not a tire kicker.

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Bird Anderson: I'm more and more renters, particularly those in urban or denser settings.

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Bird Anderson: Want more space. They want their own place.

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Bird Anderson: Number of builders did say there's sort of a paradox created by this

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Bird Anderson: Builders really turned off all the way off their specs arcs appropriately back in mid March, April, well now it's mid late June, early July and buyers are looking to move in quickly.

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Bird Anderson: And there's not a lot of standing inventory on the ground because of that complete turnoff for a four to six day week period. So they're trying to gauge their starts at the right pace. Now, and found the right cadence.

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Bird Anderson: And we have a good we have, we're broadly exposed across Texas, including Houston. I don't understand it but you know 20 or $25 oil prices is not creating havoc in that market for housing at this point.

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Richard Green: No Burt could, I could I just weigh in on that a little bit because of Houston has become remarkably diversified over the last 40 years

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Richard Green: And so I did an analysis. A few years back on what happens if the price of oil falls by half to employment in Houston. And what happens is relative to the country.

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Richard Green: Its unemployment rate goes up by about one percentage point. So that's real. But it's not enormous whereas if you had done that analysis for two years ago that that kind of decline.

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Richard Green: In oil prices would have been catastrophic. So I'm not that surprised Houston is a real economy now. I mean, it's better educated to in the average American city.

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Richard Green: Health care, of course, it's very well known for, but it's got a lot of other stuff going on too. So it's not your grandfather's Houston.

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Bird Anderson: But we serve. We had a longer sample period, but in the WHEN WAS THE LAST ONE OF THESE 2014 or 13 or 15 with oil prices dropped so precipitously we really put on a full court.

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Bird Anderson: Oil market surveying portfolio review that happened every week and every month. And we did see a bigger drop. Then, of course, this over a longer period of time. We don't know what we've seen now over that they've dropped drop in March, April to the big spike, but

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Bird Anderson: There was a not a notable change at all in the entry level lower prices and there wasn't a noticeable change for at least six months to a year in the

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Richard Green: Second, third

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Bird Anderson: Move up in the higher end houses which, for those of you in California may know

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Bird Anderson: A higher end home in

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Bird Anderson: Houston is $500,000

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Bird Anderson: Not to milk.

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Bird Anderson: So anyway, these are the comments that we've seen. I would just say what the builders. Now, what are they saying they're cautiously optimistic, they're happy. They're still keenly monitoring risk.

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Bird Anderson: A number of them say that active adult picked up, notably in July and they're bullish because so many people stayed home, even more so than the non active adult in the

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Bird Anderson: Normal spring selling market of March, April, and intimate act of adults for the latest now it's come back some in June and and that could be positive.

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Bird Anderson: Everybody's unhappy about lumber and everybody knows that code is here.

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Bird Anderson: It's surging in many places, including many hotter markets and they are not. They're delighted with what they see, but they're not losing their minds and beginning to just flush the gas pedal.

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Bird Anderson: This is a comment at the bottom from the CFO of a large private home builder heavily concentrated in the

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Bird Anderson: In the southeast entry level and and this guy's a 2025 year vet says it's the best market, he's ever seen not Greylock he doesn't have a relative around that or anything. Just ignore this is the best market I've ever seen.

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Bird Anderson: So what are they doing what were they doing on this is sort of our timeline. So the first thing that everybody did is think about operating and safety. The second thing they did is protect the backlog that they had from that robust January in February.

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Bird Anderson: And the next thing they did is figure out how to build houses and get inspections and get appraisals and get people to look at houses virtually and so forth.

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Bird Anderson: And the next thing or simultaneous thing they were doing like we all were doing was making sure we had enough capacity in our networks and our

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Bird Anderson: Our hardware and our software which was going to function effectively and it did. It's remarkable. And I'm not just talking about the large national home builders that the technology that people have deployed into small and medium middle market and building is quite impressive.

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Bird Anderson: Um, so that was sort of the first phase, you get in the next phase, people start making some defensive draws, and then they start paying those back in name.

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Bird Anderson: Everybody from the get go, was stress testing and testing for impairments. They all turned off their land spend for four or five, six weeks and slowed down their development spin. Same with the specs.

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Bird Anderson: And then there were a handful of businesses that publicly announced some layoffs and some cuts and some others that did not announce it, but we know that did it.

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Bird Anderson: Once the Fed stepped in and the bond market stabilized. We did see some of the public builder.

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Bird Anderson: Issue long term debt. Some of it was to repay the defensive draw some of it was just to take advantage of an attractive market and refinance.

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Bird Anderson: Debt coming down the road and now they're looking at just generating enormous amounts of cash margins are strong in home building when you turn down kept x which is land spend and inspect spend and close out backlog you generate liquidity.

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Bird Anderson: So why in the world is this going on. Here's the take that we've gotten from our customers.

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Bird Anderson: And we in the in in in the conversations we have in credit meetings and portfolio meetings once a week that I'm engaged in which is wait a minute, this is great. We're delighted that line the world.

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Bird Anderson: housings tied to jobs, jobs are getting crushed how How what how what, what the hell is sort of what we're questioning and I think the builders are saying the same thing. So, in no particular order. These are the things that we can hear over and over. When we asked that question of builders.

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Bird Anderson: We've got in court extraordinarily low mortgage rates their hundred hundred and 50 basis points lower than they were six months ago.

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Bird Anderson: There's lower competition resales are down and now spec inventory or new homes is down.

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Bird Anderson: That's good for margins and that's good for New home sales when resales are down.

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Bird Anderson: There is some pent up demand we're sure and probably some pull forward.

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Bird Anderson: The mid April, I mean, mid March and April, and I told you, it really dropped precipitously is one of the stronger four or five week periods.

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Bird Anderson: The other spring sales market every year and it was not. And we think that and builders think that a lot of that came back in June, May and June on top of what would have already been there and they enjoy

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Bird Anderson: People want to get out on apartments or urban density mentioned that earlier.

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Bird Anderson: People. This is notable people believe consumers believe that their employer is going to let them work from home, either all the time or quite often going forward.

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Bird Anderson: And so the daunting commute that prevented them from moving to the next herbs is less of an impediment. Now, and so they're making the plunge.

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Bird Anderson: If you have to spend all day in your house. Let's have it be a new house. That's nice versus an older house or an older apartment.

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Bird Anderson: By the way we did here also, a lot of the lot of the younger millennials, or mid age millennials that you know aren't aren't a nice apartment with cool amenities are also buying out in the burbs because they can't use the amenities and it's crowded and uncomfortable if they do.

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Bird Anderson: And then you've got sort of the all the above together gets anybody that's on the fence to act.

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Bird Anderson: That little comment in the red box at the bottom is

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Bird Anderson: Yeah, it doesn't make any sense. But works at this is sort of the we list all these reasons, on the left. But still there's 15% unemployment still there's a good friends.

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Bird Anderson: The picture above is down in Florida for one of our clients mentor communities with you know the the active adult buyers back back in action.

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Bird Anderson: So,

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Bird Anderson: Last couple of slides just I wouldn't have builders came into 2020 and really good position. There was a bad last quarter of 2018

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Bird Anderson: And builders have with every builder conference, you get to the question is, how long is this cycle going to be are we in the eighth, ninth or extra evenings or weekends coming it's. No one's saying we're in the first or second

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Bird Anderson: So I think builders hear that and they're smart and again these are survivors of the Great Recession. They sort of came into the this year.

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Bird Anderson: Lower leveraged and shorter lane and and that's a safer place. They also had very strong margins in their backlog.

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Bird Anderson: And and as we've been saying, they've been sort of feathering the gas people through this pretty strong housing market LEADING INDICATOR OF IT. Instead of flooring it

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Bird Anderson: Perhaps because of the time that it's been in recovery and perhaps because they really didn't get a scare with a pretty rough fourth quarter at

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Bird Anderson: Their mood have covered this a bit they're happy, I would know one of the things we hear so often and I love our clients is because they say things like this. They're very proud of how their team has performed

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Bird Anderson: And their resilience and their adaptability and their coping and they're very, very proud of the technology platform that they had or Quickly, quickly.

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Bird Anderson: Put sandbags around really held up nicely.

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Bird Anderson: Nobody thinks this is sort of long term sustainable at this right. Maybe it may be a fine housing market, but it's not going to be great. Like it is right now.

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Bird Anderson: With an unemployment place like this, but they all send a there's just not a lot of inventory down here so doomsday downsides or not so bad. And of course, they all know we're not coronavirus are

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Bird Anderson: Real quickly on banking.

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Bird Anderson: I just put the little, the little box in there. So this is what this is. This is just like a made up deal on a project one with a live or plus 300 spread

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Bird Anderson: We have plenty higher and a few lower than that.

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Bird Anderson: So,

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Bird Anderson: If you looked at that, you know, in January, we were making nearly 5% revenue and with the floors that, you know, maybe more, more Wells Fargo and market customary of 20 basis points or so.

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Bird Anderson: You know now live wars down 90% and so instead of making I'm making closer to three than five as a 30% drop in revenue. And while our cost of funds is lower our equity charges are not lower our fixed costs are not lower our long term bonded coupons are not lower

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Bird Anderson: And so, you know, that's bad, that's stressful on bank revenue. And so what are we doing it with what we've got. What we're just trying to shore it up a bit.

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Bird Anderson: With how we price and how we how we put live or floors on it up different banks are pursuing that differently and we pursue it differently given different circumstances, but we tend to really hone in on concentrating on the higher floor.

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Bird Anderson: Than 25 or 30 basis points, you know, two or three times that ideally

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Bird Anderson: And then

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Bird Anderson: We're also

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Bird Anderson: Looking at this is largely gone the last bullet. But the other this sort of paradox where banks.

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Bird Anderson: Went when all the, particularly the money center banks had big corporate clients drawing down lines of credit and stacking cash on the balance sheet.

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Bird Anderson: It actually caused some funny stresses on some of the ratios that we run arguably when you were in a better liquidity and financial condition than ever. That's sort of we could take that off that sort of gone away.

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Bird Anderson: But that was an anomaly in sort of the credit thing in terms of what we're doing in housing and home building

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Bird Anderson: We're just sort of putting an extra lens on everything that we do. We think we think we're thoughtful underwriters anyway.

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Bird Anderson: But we're putting an extra lens on it and just harder sensitivity testing.

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Bird Anderson: And you know, when we were closing things in May we were saying only combat against you know the last six or eight weeks sales not pre sales and now we may say will will strike out June. That was too high, it messes everything

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Bird Anderson: Just to be more conservative, we have been monitoring the portfolio and doing weekly, and monthly customer checks and sort of formalizing that

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Bird Anderson: Last page.

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Bird Anderson: I don't know.

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Bird Anderson: What's temporary or what shorter term maybe for a while with of low range that won't be forever. It may be a while that resale inventory is down, it won't be forever.

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Bird Anderson: I don't think the pent up demand a four or five weeks.

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Bird Anderson: With with with 57% growth in June that certainly not going to stay around. Same with the demand pull forward.

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Bird Anderson: What do I think's here, you know, or a builder's think is here.

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Bird Anderson: I think I think customers believe that going forward working from home is going to be a real option. More often, maybe not all the time office is not going to go away and team building and culture building is not going to go away but

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Bird Anderson: Working from home is going to be more frequently accepted and less. It's going to be less critical to live, you can live out in the country, you can live with a father can be

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Bird Anderson: Um, but the desire, sort of in a rush to just get out of a crowded apartment like I have to right now if we get cold and cleared a week or or diminishes. Are there some sort of vaccine. Maybe it's hip again to be where the pretty restaurants are in the in the cool burger joints and brewpubs

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Bird Anderson: Instead of this, it does this sort of the same key points.

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Bird Anderson: Many of you have young, young children in their college years or so that young now or your friends have kids in college and we get lots of questions about working at Wells Fargo.

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Bird Anderson: About commercial real estate about job opportunities about being an investment banker somewhere, whatever. So, so we really do have a robust information there. So let me know if if that's not helpful. That's it. Richard

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Bird Anderson: you're muted, Richard.

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Richard Green: You think I learned by now. Thank you very much for that was terrific very clear and

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Richard Green: Thoughtful and I appreciate your breaking down what's more certain. And what's less certain.

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Richard Green: Before I turn it over to the audience questions. I have a couple from of my own. So I it strikes me that one of the reasons we don't have a big amount of competition out there for houses for sale is because of forbearance. So people who lost their jobs.

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Richard Green: Don't have to sell their house tomorrow.

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Richard Green: And numbers I'm seeing that somewhere in the neighborhood of 7% of Fannie, Freddie mortgages right now.

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Richard Green: How are you thinking about that is that going to go away. And let me add that. And then the other thing of course is right now we

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Richard Green: All the stimulus money is going away at the end of July. Now plucky more more likely to get something, but I don't know what that is. So, so those elements that have sort of capital things moving. Okay, how much you thinking about those how much you worried about those things.

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Bird Anderson: Well, I want to caveat. First of all, I'm not speaking on behalf of inside info about the wells fargo mortgage book which is the largest one, I believe.

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Bird Anderson: That's right in the country. So I don't have an inside you know info that says we're going to do in this are seeing this, or they'll be they'll never come or there'll be a way that I don't have any of that. But in terms of what we're thinking of

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Bird Anderson: We're just sort of getting to those things, I think, right. The first in like all those lists of what we're doing and what we're banks doing the first year just in

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Bird Anderson: Battle Mode of ready to go and making sure that our teammates were a fan that we could get draws doc in our back offices in wire rooms are functioning with wire professionals working from them and so forth.

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Bird Anderson: And so we've gone through many of the same progressions that was described in the builders and right now our pipeline is not real.

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Bird Anderson: Flush. Flush with new loan request for people anxious to take a big deal. Down in September or October so

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Bird Anderson: The, the application of those sorts of disciplines for a new credit request would be where it would first have. And then the second is, you know, in our second and third quarter overall portfolio reviews. So yeah, we're laying on add that to the list, you know,

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Bird Anderson: competition from secondary mortgage foreclosures, or people that are not foreclosed but want to sell so that that doesn't happen.

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Bird Anderson: We will lay on that we just know that inventories are very light. Now, and even if that comes in, it probably could absorb it, and new home inventory, which is really the only thing we can control is also very low. That's it. ONE OR TWO MONTHS SUPPLY so

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Bird Anderson: And not many builders are really long land. And so I feel okay there, but we will get into that analysis right now.

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Richard Green: Okay well along those lines. Question from Nicole Smith.

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Richard Green: I'm

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Richard Green: Is it just harder to buy a house now a new house or an existing house because of more stringent lending requirements and that's to some extent undoing the benefit of the lower interest rates.

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Bird Anderson: Low

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Bird Anderson: It's not apparent that it was in June was up 57% June every June by our sample and it was a 54% or 55% in earns a sample. And we'll see the public builders recording, you know,

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Bird Anderson: Starting in 30 days or so. So if the those facts would suggest that it's not anecdotally, I heard it was brutal and frustrating.

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Bird Anderson: And, you know, mid March when the the the 30 year mortgage, which has like a forever history of being sort of in a 160 to 200 spread and over the 10 year

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Bird Anderson: Was suddenly twice that or two and a half times that. Yeah. And people just in despair with this 10 year it's 60 or 70 or 80 basis points. Why in the world is this non mortgage company quoting four and a half or 5%

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Bird Anderson: And I think that was a couple of reasons. The Fed hadn't stepped in, yet there was a risk premium being added, and a whole lot of mortgage pipelines were stuffed full from a very busy sales period.

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Bird Anderson: Already talked about in January, February, and a very active refinance period.

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Bird Anderson: So it's just sort of pricing to discourage demand almost the Fed stepping in was the biggest part and you saw that spin downward

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Bird Anderson: In terms of underwriting overlays. I think there are some as it relates to extra effort to make sure these people are not going to miss their first payment, because that's where the underwriter originator really gets the immediate put back with no debate.

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Richard Green: So we have a question. By the way, for people who have questions please type them into the Q AMP a box from Stanley Kafka, what do you see a you mentioned lumber, but more generically. What are you seeing in the world of construction costs and the cost of finished lot

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Bird Anderson: Well, it's, it's

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Bird Anderson: We went to see things validated for us. We see it in margin in net margin in particular to see

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Bird Anderson: Actual global, you know, sort of macro impact. It takes we won't be until December or sep tember when we, you know, when

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Bird Anderson: closings from yesterday and today, and and may are suddenly now in September, October. So that's when we see sort of margin performance. So

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Bird Anderson: Everything I tell you again is and totally not what we're seeing our builders margins actually do universally we hear lumber is scaring them in university we hear the labors. Okay. And the other supplies or of k here in there. There is exceptional appliances

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Bird Anderson: Lighting in particular.

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Bird Anderson: Supply chains to China supply chains to things manufactured in Michigan or Seattle or, you know, a closed state that was everything was closed for so long, but that seems to be loosening up a bit. It seems to be that they're the same flat.

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Bird Anderson: With those few exceptions.

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Richard Green: So let me ask you, and forgive the that's the audience has forgiven us to have a really nerdy question but like when your computing your equity capital charges you tell us a little bit about how you do that how you determine what that cost is

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Bird Anderson: Me. Yeah.

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Richard Green: Because you were saying this is one of the reasons that you know that the cost of lending is not going to fall.

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Richard Green: The way the light live or as falling

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Bird Anderson: Yeah, we can't afford I'm live was falling 90% we

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Bird Anderson: Have 90% but we fallen 30% so so it's that that was that's the common argument.

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Bird Anderson: I have made in our negotiations with when we've been trying to get either more spread or more for which is if this deal work for you in February or January at 4.8% or 5.1% and I'm going to increase this or increase that and the result is it's 4%

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Bird Anderson: You're still a winner, you're a winner by 20% your 100 basis point one or 15 basis points or 110 basis point winner so

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Bird Anderson: So that that

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Bird Anderson: That's the the driver on the revenue side on the cost of capital side we have robust models that update our preiser, which is how we calculate our, our ROI always

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Bird Anderson: Which was what we do when we're pricing loans and then we have, you know, and that literally changes, week to week

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Bird Anderson: And it's based on models from our treasures department and so equity capital charges. I can't tell you, I fully understand other than there's a reserve premium, there's a risk premium, there's a sort of scarcity premium and they've definitely come down of the last several weeks. Okay.

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Richard Green: All right.

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Bird Anderson: Because they're not, you know, it was, it was hard to get something to hit a bar six weeks ago.

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Bird Anderson: Really hard to get something to hit a return hurdle six weeks ago now, it's still higher than it was in terms of spread or and or four, but not in the all in. Right.

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Richard Green: I'm from James Torres. A question our developers.

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Richard Green: bullish on new projects that will be completed for example by 2022. So I think what what James, try to get at is, are people thinking about post coven world.

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Bird Anderson: Will builders.

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Bird Anderson: And you've had great ones as as guests.

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Bird Anderson: builders are constantly

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Bird Anderson: Walking a line and that line is growth that line is being an entrepreneur and that line is is keeping a future pipeline so that they have a construction and development business.

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Bird Anderson: And so they are absolutely in the market, looking at deals for 2022

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Bird Anderson: And and keeping those on the table. I don't know how many people are trying to tie up more lots on a lot take down in Dallas or Houston or Atlanta or Phoenix.

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Bird Anderson: For the fourth quarter of this year, or the first quarter of next year. I think they're probably saying what I've got. Good. I'm actually talking to the developer about the contingency plan for me to extend that out.

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Richard Green: So you we've talked about the cost of debt. One of the things you didn't mention her. You did. I might have missed it, which I do from time to time underwriting standards. Sorry, our loan to cost changing dramatically or stayed, more or less, steady, for example.

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Bird Anderson: It. Well, you know, again, I'm part of a humongous commercial real estate ecosystem that includes

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Bird Anderson: Fannie, Freddie agency finance CMT s multifamily capital hospitality finance refinance senior housing finance retail. I mean, everything. So I'm thinking today as homebuilder finance and development finance.

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Bird Anderson: And I would say the only. No, we have not said what we used to do at 75 will do at 65 and what we used to do at 65 will do a 55 we not come out with any new policies for grids, as it relates to proceeds.

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Bird Anderson: What we have said is what we would have done in January or February structurally is probably not precisely what we ought to do today, in light of 15% unemployment and coded crisis and, you know,

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Bird Anderson: very uncertain outlook particularly sort of short, medium term, but to me it's this six, nine months.

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Bird Anderson: I don't, I don't think there's going to be doing today for our business for our customers.

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Bird Anderson: But it. I have no idea what's going to happen in the global overall economy. And so we would just say, well, this looks precisely like the same term sheet you gave this customers for a similar deal in February. Shouldn't be a bit more conservative

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Bird Anderson: And so we might say, yeah, probably should. And so whether that manifest itself in a higher liquidity requirement or little bit lower proceeds or a little bit higher.

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Bird Anderson: presale versus spec component or whatever it may be. We probably have some overlay on there. I did mention that one of the things, there's, there's probably an overlay or two on those on those structures but

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Bird Anderson: By now the portfolio remains in remarkable shape that the number of downgrades we've done in this session is minute particularly compared to many other segments in the bank.

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Richard Green: So it, it makes me wonder about the influence of the regulatory regime on what you've been doing the last several years. So one of the things about

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Richard Green: Basel, is it puts a very heavy risk weight on new construction lending. Um, did that you think that's influenced how you've done underwriting. So this is going back, of course, what, four or five years now.

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Richard Green: Do you expect those rules to change anytime. Do you think those rules are sensible or are they actually helpful or somewhere in between.

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Bird Anderson: My official answer is I don't

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Bird Anderson: Know, and the caveat caveat that I do not know what do I think I'm not quite sure.

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Bird Anderson: Across the commercial real estate spectrums across the banking system that there was a lot of aggressive lending.

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Bird Anderson: pre pre Great Recession and a lot of it for many banks was higher leveraged with sort of this thought, well, it's okay that I have higher leverage because I've got recourse if for a secondary source.

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Bird Anderson: In commercial real estate, not so not as much in housing and in commercial real estate. There was a real pivot to less recourse and more upfront equity. So, so there was that sort of was

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Bird Anderson: I think that went in tandem with basil and the

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Bird Anderson: The extra capital charges for for construction and land. I think they were both motivated by the exact same thing. The bank had a very difficult time in those asset classes.

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Bird Anderson: And the oversight said, Y'all had a very difficult time in those asset classes. And so I think it was a bit simultaneously. So yeah, I think, I think the the stroke. If you just look at proceed or London two values or lung costs in any

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Bird Anderson: In any of the commercial real estate classes they're buying larger blower.

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Bird Anderson: And said, that's good. Front from the last perspective, it's harder to get if you're a developer to get returns on your equity, but the risk profile of your assets is probably lower as well.

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Richard Green: So I, I want to come back to your comments about. And by the way, if you have questions for bird please type them in the Q AMP a box.

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Richard Green: I found that your comment interesting about how the higher end stuff is not doing as well as stuff of further down the price spectrum.

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Richard Green: And you were very specific Houston high end is half a million if you could talk a little bit about what high end is in other parts of the country. And what do you suspect, and I understand again.

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Richard Green: I'm not holding you to rigorous data analysis on this, but why do you suspect, you're seeing more strengthen the less expensive part of the market visa V, the more expensive part of the market.

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Bird Anderson: Well, I think, a handful of reasons why I think it's always stronger.

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Bird Anderson: It just, it's just almost always stronger. I hadn't been in real estate in banking very long when I learned about the housing pyramid and

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Bird Anderson: The top of it is the $2 million houses are in the bottom, there's the $200,000 houses and there's just infinitely more people that can buy the 200 or $300,000 house and that's when rates were eight or 9%, by the way, when I was learning that or 11 when I first started

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Bird Anderson: So I think it's always been now.

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Bird Anderson: That doesn't mean that there's not a good move up housing market. I think it is considerably veteran gene, and it was early, but I think maybe why it hasn't been as good is

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Bird Anderson: Neat. I'm 57 years old. I'm an empty nester I live in a house, way too big for my wife and I, that I love. Where is

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Bird Anderson: And while we have periodically talked a lot about a smaller house a cooler. When a townhome, you know, a newer one

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Bird Anderson: We're not gonna listen we weren't going to list our house in April.

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Bird Anderson: You know, and, and try to find one because rates are low.

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Bird Anderson: There were a lot of reasons why people were saying that that had been a bit before coded. Why had been a little slower versus the entry. One of them was

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Bird Anderson: I refinance my mortgage two years ago and and when rates went up relative to that.

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Bird Anderson: I don't want to trade out of this mortgage for higher mortgage. Wow. Mostly actually buying a more expensive house because it's new and even though it's smaller. It's newer and it's closer in and it's got more stuff. And so I don't want to be one of many

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Bird Anderson: I think that's been a couple of reasons. But I think the first one is just, it's always stronger. The second one is

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Bird Anderson: Most builders in any place are trying to find a way to do it a little more affordably because they know what attracts more buyers.

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Bird Anderson: And the last is less critical now but coming out of the recession in 2011 1213 the first mover was absolutely them up and the second up and there were still pretty heavy mortgage overlays in the mortgage entry level market and with FHA, and so forth and fewer programs for those buyers.

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Bird Anderson: And less confidence from those buyers.

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Bird Anderson: That the game to swing probably 2015 16 if not before to where the outperformance of the move up in second move up began to shift into a little bit outperformance babbitt entry level and the first time.

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Richard Green: So I'm going to a question from john lover and I'm going to, I'm going to

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Richard Green: embellish it a little bit hit his question is just do. Are there any trends you see in California homebuilding markets that are different from the southeast or the overall national market and you talk

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Richard Green: A little bit about places that were shut down versus not. But the other thing I'm wondering about is, well, nationally foreign borrower.

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Richard Green: Excuse me, foreign buyers are not particularly important in kept their place to California, where they really are. And I've heard anecdotes that specifically the Chinese just started in the market anymore. So any thoughts you have about that for

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Bird Anderson: A handful handful Orange County had a pretty good June, and it was in and everything in Orange County is pretty expensive.

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Bird Anderson: And it seemed to have a pretty good June, and it was definitely slower out of the gate.

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Bird Anderson: And had a decent day, but it had a very strong June from from our, our channel checks there.

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Bird Anderson: Sacramento Central Valley Tracy mantega

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Bird Anderson: Eastern Inland Empire.

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Bird Anderson: Are doing very well.

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Bird Anderson: And that's still not consistent with other larger sub markets and markets. I think it's exaggerated because, particularly in Northern California and into the central Northern California like Sacramento and Tracy

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Bird Anderson: That's really where you see they area. People are builders are saying Bay Area immediate Bay Area tech workers or other related workers that worked from home one day a week or never are now working from home, five days a week. And they're quite confident that they can do that for a while.

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Bird Anderson: And when it goes back to normal. Normal baby two days a week, and they can endure that brutally long commute twice a week, but not that days a week. So those markets are really seen that belief from the work from home.

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Bird Anderson: So I would say that would be a trend that would, you know, be less so in Atlanta or less so.

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Bird Anderson: I guess that's what i limited to that in terms of the foreign buyer. I don't know. I doubt that OC was back because a lot of Asian buyers suddenly jump back in one month but it but it, it did have a much better month, month and a half.

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Richard Green: Oh,

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Richard Green: Well, a bird Anderson. Thank you for spending an hour of your day with us. That was really helpful. I'm sure our group. Really appreciate you taking the time.

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Richard Green: The next to lust perspectives. We have to next week on July 22 we have my friend Chris Mayer from Columbia University Christmas thoughtful guys on the mortgage market. I know. He also owns a reverse mortgage business. And then we're going to follow up on Thursday.

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Richard Green: When something that we're doing jointly with Ross program and real estate, which is happening even as we speak. We're gonna have a fireside chat.

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Richard Green: With our luck leadership team have a meal had DOD and Bill witty, I will be interviewing the two of them that day. So we'll look forward to seeing many of you at those two events. Next week again bird Anderson. Thank you so much for joining us today.

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Bird Anderson: Thank you guys, appreciate the opportunity. Have a great rest of your week. Okay. Take care.