John Curry


Episode 46.

John Curry, CEO of Setanta Development Capital

00:00:00 – 00:04:00

So how does the nineteen, seventy, eight to nine four housing market compared to today’s market? Surprisingly, there’s a ton of crossover and over supply. News Flash, we have been severely underbuilding since the Oh, seven, O eight crash. Don’t let anyone tell you otherwise. With that said, where are we now from a building supply perspective, and where are we heading? I’m Dalton Elliott. This is the real estate of things. You’re listening to the real estate of things podcast. John Curry back again, CEO of Satanta, the coolest land development lender in the whole wide world. Thank you for joining Sir. Thank you, sir. I’ll take this. We uh, we have to do one of these in person. This is our is our third episode together and we gotta we gotta get together. We’ll well, I gotta GET UP TO CHARLOTTE AND UH, next episode that you and I do together we have to do in person. I say, I don’t think. I don’t know if you can see it over my right shoulder. Let you know. Um, we do have a sort of our my my drinks trolley there and there. Well, it’s not a puppy. There is a bottle of Van Winkle Um that I could be tended to open and depending on your your schedule. So I have that as an open invitation next time you’re in Charlotte. You’re a gentleman and I’ll make my calendar right so we can make this happen. Beautiful, beautiful. So we we’ve touched on a lot last week. I want to dive right back into it and I jotted down a quote that I’m gonna keep here Mary the House. Date the rate. So I love this that I as I say, that’s from the smartest Irish person in the industry, Margaret Wheel, and I am I am quoting her. I’m not not stealing her slogan. You’re a gentleman and, yeah, you don’t want to cross Margaret and have her coming after you. And, as you you said, the second smartest. We’ll we’ll settle for the second smartest Scottish person in the in the industry. Now, for today it works all right. So over supply, let’s talk about that. That’s kind of where we left off. Um, talk to me about it, just just basic supplied. Man. Where in the world are we? And and we talked about Um. You know, yes, there’s kind of been influx of lots being worked on. But how does that really play out over the next few quarters? Yes, certainly so. Like there’s there’s lots of different things to it and and people will have different opinions on it and I’m probably I’m probably on sort of team. We’ve been underbuilding for, uh, you know, fifteen years, and some very smart people disagree with that. They think we’ve only been underbuilding for a year or two. But we all agree that there’s some level of of underbuilding. But over supply is something that you can’t you just can’t fix easily and over supply is always going to be the thing that a creators housing market just like a creators any other market. That’s and I think if if there was one main takeaway I would love for people to get, is housing is not some mystical, confusing product and the laws of supply and demand still apply. And if you were to look back at Oh seven, O seven and oh wait were dominated by the emotional response that you could keep building homes and people would keep buying them and you could keep getting new mortgages and it was all driven by that. And again, it’s a well told story, but to understand that it was not a surprise that we were over supplying the market. All indicators were telling us that. We were just being told this time it’s different. And I think I mentioned this before when we spoke last year, but any time you’re in a meeting and somebody tells you this time it’s different, that’s when you get up and walk out and you know it’s it’s never different. It’s just where are we in the cycle? Where are we in in what’s happening? And you know that you can’t over supply and come back to buy. You it’s just, you know,…

00:04:00 – 00:08:01

…you can have wishful thinking. That made us go probably an extra year, two years of overbuilding, with a course correcting, but it was it was obvious. So you know, over supply, we can’t, we can’t fix and what we’ve done since then has been just just shocking from a home building perspective. So, for example, and actually I think, no, I thought I was actually prepared and I had written down these numbers. So these numbers are going to be in the in the rough, in the rough sense. But you know, this is all from the Fed Bureau. If you were to take housing starts from two on average we did four new starts per month. Right. So that’s the average over that ten year period. And if you take the period of time from two thousand and one through, sorry, then if you take time period from two thousand one through, including that over build period, we still only averaged about four hundred starts per um per month. Now, during the boom at sometimes we were doing twenty three thousand starts, starts, and over that boom period we averaged about so definitely more than than average for for a sustained period of time. But even over a ten year period with all of the over supply that happened, the undersupply quickly kicked in and we averaged the same amount of starts as we did now from through when the biggest generation since the boomers, started coming into their home building, home buying years, at home renting years, we averaged over the last ten years, including one boom, we averaged less than Um one thousand and fifty starts. So we have averaged over ten years four hundred starts per month less than we had in the previous average of the previous ten and twenty years before that. You can’t look at that and say that we have addressed the supply issue, that there is oversupply. And yet you read articles. I won’t cite the one because I don’t want it to get more traffic, but there was a well read, well shared article the next housing crisis and over supply of homes. And you’re like, can we, can we just get to supply of homes first? Can we just get to like, can we go from undersupply to supply and and then let’s talk about oversupply? But you know, and it’s it’s just a very it’s just very frustrating to be hearing people far smarter than me, and I’m not being disingenuous, they’re far smarter than me there, but they bring the emotional baggage off oh seven, O eight, and it just clouds a lot of people’s judgment on the fact that, you know, we don’t have enough over we don’t have enough homes yet. And if we were serious about the affordability issues are brought up on our last episode, if we were series about that, you would have local ordinances doing everything in their power to make housing more affordable, to make the cost of land less expensive and and you know the the example of this, the best market to share this is the Texas real estate market and now I have a little bit of concerns about Texas, just because there’s more homes under construction in Texas, like genuinely on a objective basis, not on the just how long it takes to build homes, but they’re building more homes than they ever have in their history and that’s you know, there’s only so many, you know, California transplants that they can absorb. But you know, at the same time, what’s wonderful about Texas is land is pretty cheap and land is pretty cheap. You the cost of developing is pretty cheap and you can we’ve got a project in Houston where the finished lot sales, finished lot sales in a booming part of the Houston submarket are and they’re being purchased by by private…

00:08:01 – 00:11:58

…and public humbuilders for finished lot. Meanwhile we’re seeing deals in Charlotte where the paper Lot, the unfinished that just barely entitled, is selling for Sixty to seventy thousand a lot. And that tells you the difference between a market where it’s easy to get land entitled and Land is plentiful compared to compared to otherwise. So if we were serious about it, we would deal with. We would sort of deal with the regulation part of it, but we’re not. And I think the key thing for people to understand when we talk about supply, and I think I addressed this in our in our first podcast and last year, is, you know, for us to get enough homes to meet demand, we would have to make regulation very, very simple. We would need to make land set owners, you know, willing to sell at reasonable prices. We would need to have a labor force that can actually develop these lots, we would need to have the weather to actually play ball and stop being as as temperamental and, you know, across boards as it is, and we would need home builders to be able to develop homes as a probably twice as fast as they build homes, twice as fast as they currently are. None of those things are happening, but all of those things would need to happen for us to just meet our actual, you know, generational demand. We can talk a little bit about, you know, pricing demand, but but that’s what we need to happen just to meet the generational annual demand of housing and it’s just not going to happen. Yeah, so we’re in your estimation. We are not close to getting back to supply. Far aways out we are. We are two to three years. If we had continued the pace that we started this year on, we were the eighteen months to two years from hitting normal supply levels. The reaction of the market to the Fed rate hikes has indicated that we will probably build less homes next year in the year after than we built these previous two years, which means, ironically, and the measures that we’re supposed to curb inflation will just result in less homes or fewer homes, and those homes will result in higher rent and arguably higher mortgage, which are two of the leading issues when it comes to inflation. But again, smarter people than me think that that makes sense. Fun, Fun, fun. Uh. Yeah. The one terrible habit I’m trying to curb is, UH, when I’m laying in bed, oftentimes at night, I’ll scroll through Reddit News. So just different. You know what, what what’s trending news? Wise, the other night I stopped after ten minutes It’s all doom and gloom, and there were two scrolled through. After I realized there had that feeling, I scrolled through because there were two big teams Um, you know, one theme, which we will not touch on. One bit pretty much demise of the American republic. Uh. The other one was housing is a complete disaster right, just absolute doom and gloom, Um left and right. You’ve referenced a couple of articles over this episode, in the last one and yeah, just I call that out as nothing else than it seems like there has been just a drastic influx ever since rates started to increase in February and March. There’s a drastic influx of Um, negative media attention, that really scary media attention towards housing, which just that seems completely counterproductive. But you know there’s they, you know, interests are not terribly aligned with Um, anything other than getting eyeballs put to something. But just scrolling through something, I noticed that just terrible doom and gloom. And even you know, we have TVs throughout the office with the news on and to…

00:12:00 – 00:16:00

…housing can’t get a break. Well, it’s it’s so and what’s interesting and what’s worth bearing in mind is like, as I said, I am actually quite bearish on some of the aspects of it and what I’m what I’m laying out. I guess what I’m laying out is, sadly, good for me, good for our industry somewhat, good for for you guys and your industry and good for builders, good for developers. You know that underlying demand is not going to go there and, if anything, we’re going to see costs come into two alignment. So that’s that’s good. But there’s going to be there’s gonna be losers and ultimately the losers are the is the home buying public, and until we get more homes delivered in a more predictable efficient manner, you know they’re going to be paying too much and they’re gonna be having to choose between renting and buying and they’re gonna have to be choosing between roommates or or putting our family formation. So that’s not good. And again, as an industry, if we were serious about this, we should be, you know, talking up what is actually happening and understanding that. But there’s other people that it’s bad for as well, and perhaps people who are listening to to this podcast, for people who are interested in the real estate market. So, for example, there’s a lot of people who put land under contract at a very high price and are taking it through the entitlement process right now, expecting that the builders are going to pay the same ridiculous deposits for any piece of land that they were a year ago. They’re not. Builders are going to be more selective on what projects they do and and again, that’s good for us because we only back projects that are fully entitled and Pre sold. But for that, you know, developer or land entitlement person, they just spent a long time, because land entitlement takes years. They spent a long time thinking that there was a pot of goals at the end. It’s now being snatched away, at least, you know, temporarily, and you know, fix and flip. It will be interesting to see what happens with that, just given where pricing is, because we do expect you to be some level of a cooling off. And interestingly, and this will be a decent time for realtors, and you would have thought that, during the housing boom we had over the last two years, that this would have been a great time to be a realtor. In fact, we’ve seen the number of realtors decline because they don’t have enough inventory, they don’t have enough bread and butter things to sell and you know, the the what we talked about in the last episode, things selling within a day or so. That’s not normal. They’re normally, you know, required to sort of turn through some things, but also they’re not. They’re used to seeing more inventory on the resale side come to market. That’s not happening. So that will be slightly better for them. And then for the person who is who, you know, has been sitting on their home for the last two to three years, has got a lot of equity that’s builds up in that home. Maybe they were getting ready to sell because they were going to move somewhere else and they’re gonna have to get used to the fact that maybe it’s going to take two to three weeks to sell. Maybe, shockingly, their home may be on the market for two three months. That’s not the end of the world. That’s no normal. Before the home that we we bought in the previous home, when we put that on the market, it took I think five months to sell. In early we finally sold it. So we’ve actually had two homes for a little bit, because that’s normal. You know, some people people need to get used to to what that means. So it’s not that. It’s it’s not. What I’m not saying is the good times are here forever and you know, nobody needs to worry and ignore those silly headlines that telling you things are are getting bad. But what I am saying, and this is something that you know, you and I have talked about offline and this is something that I when we as a team, we spent a great couple of days in the leaving one office in Greenville sort of comparing ideas, because obviously we do a and d you guys do vertical and this is a very good synergy there. But I think one of the things that everybody heard me say, we’re probably sick of hearing me say, is that there is a huge difference between good and bad and better and worse. Is the market getting…

00:16:00 – 00:20:04

…worse from a price perspective and from a you know, time on the market and increasing inventory? Yes, compared to the crazy highs, it is getting worse. Is it bad? Not even close it. Things need to get considerably worse and I’ll give you one quick example on that and then maybe we can sort of talk a little bit about the pricing side, because I think one of the things we’ve I’ve mentioned to you is I’m a consider myself an expert on housing from and public builders gross margins over the last ten to fifteen years. So I want to use that I want to use that knowledge as best I can. This is probably the only outlet because my kids are certainly sick of hearing me, hear me talk about it. M but you know, standing unsold, finished but unsold inventory is a really good measure in the community. That tells us that in a new home community, how many homes have has a builder built but not yet sold? And there was news in from May to June that the numbers had gone from zero point three to zero point four, which we were reliably informed by the survey provider was an increase of thirty three percent. Thirty three percent rise in unfinished inventory, right. So that means that in five communities there are two homes finished and unsold. Now, thankfully we were able to look at the data which was provided by the same group and we saw that in the number of the average number of finished but unsold homes was one point eight, which means in five communities there was eight unfinished homes. Right so, and that’s what I’m talking about, good or bad, better or worse. Things could get four times worse and still be good. You know, we could have eight unfinished home sold but unfed, unfinished but unsold homes in communities and, you know, in five communities, and that would actually be normal. However, we’ll touch on this, but with margins it will be reported as bad. The nature of the beasts can’t, can’t do much about that. But that’s why you have to go the extra step. You got peel back a la. You can’t if you just go off the headlines. M Dark and depressing generally speaking. Right. So, with the time we have left, I definitely want to hear this because he shot over a note and said I’m an expert on eighty four and I’m just quite curious to to hear about this. So please do uh, forge ahead. Yeah. Well, I think what’s important note is, you know, we talked about supply and then you have demand, right, so demand gets impacted by multiple things and, as I said, we have a generational demand that’s not going to get fixed. But you know, if they can’t buy because of work or they can’t buy because of high mortgage rates, you know you need to sort of see, you know, what what happened. So the best thing we can do is look at forty years ago and see what happened then. Now starts plummeted. Sales plummeted for a year and a half to two years and then they came back up. Now, we didn’t reach the seventy eight highs until the mid eighties. But in a real you know, you know what actually happened in housing. You know there was a year and a half off of a drastic drop and then it just sort of again went back to normal. So if you were cutting your cloth to normal, you know you had maybe a year of choppiness. But what’s more interesting is what happened to the price of land. What happened to the price of homes. So the average home price in night was forty seven thou dollars. Give her take Bo when interest rates were at eighteen percent, the average home price was sixte so now that was an increase. What the economists…

00:20:04 – 00:24:00

…will tell you is that on a inflation adjusted basis, that was a five percent decrease in home prices. Fine, tell that to the person who has bought that home for twenty more than their neighbor did three or four years earlier and, you know, convince them that actually they got a good deal. You know, I was like yeah, okay, on an inflation adjusted basis the price went down, but on a Oh my God, what did I just pay, it went up considerably. And what we were seeing is that home sales, while they did drop, they still continued again because people need to live in homes. People need homes. We’re not expecting anything like that. We’re thinking, most of the smart people are thinking, that, you know, mortgage rates may go up to six and a half, seven percent and if anything, the word seems to be that, you know, that may be tempering off, given the big R that everyone is afraid to mention. So you know, and if that happens, with start seeing things go down. But even if they do, that’s six percent. Right now, prime is four and three quarters. When we launched our platform, prime was five and a half. You know, like we have to have some level of of understanding where things are. And then that brings us to, I know you don’t have much time. That brings us sort of to pricing, and that’s where the builder’s profit margins are very important. And again, this is all public record. I’m not going to name specific builders, but I’m going to give very specific examples so that all you need to do is is do a quick Google and you can work out who we’re talking about. But there’s a public builder the announced that their profit margins in the first quarter we’re almost UM and historically they’ve never been above and there’s another very, very, very large public builder that just announced last week or the other week that their profit margins for historically they’ve never been above thirteen until the last couple of years. So what does that tell us? Well, that tells us two important things. Want to tell just that demand is so high over the last two years that even in a labor shortage and even in a supply constraint market and even the costs rising, the builders not only passed on those costs to the home buyer but they actually added some extra profits on top. And quite frankly, I don’t blame them. Given how much the industry or the market freaks out at any ill wind, can you blame them for trying to make as much money as possible and when times are good? And that’s just another example of how unhealthy our our market is that the builders have to think like that. But it also tells us something else, and this is the part that people don’t you know. I worry that doesn’t sort of translate, which is they can reduce prices, they can absorb costs and still stay within their historic norms. And yes, they have reduced their prices, but did they really? It’s the same thing with a person who put their home on the market for one point four million and then they sell it for one point three. Yes, they took a hundred thousand dollars deduction on what they had priced it, but they’ve only bought the home for seven or eight hundred thousand. Then they’re making five thousand profit instead six hundred thousand of profits. So, you know, we have to have some sort of Norman. And where I worry is I’m expecting again, this is our prediction. We’re not saying that things are going to be rosy. I’m expecting that there’s going to be a reduction in profit margins over the next quarter to two quarters, and that’s kind of priced in with the builder stock price they’re trading and around four times earnings when they should be considerably higher, which means people, you know, the market, doesn’t believe that those earnings are going to last. But my question for you is this, and it’s sort of rhetorical, but you know that builder I mentioned that the first one margins in historically never above twenty rand by nine. If they announced that their margins are in the next quarter, will it be reported that they are still ten percent higher than historic norms, or will it be housing in chaos as public builder, as earnings tumble percent? We…

00:24:00 – 00:28:03

…know what the answer is. And again, that’s where I’m saying is, you know, you have to understand what the actual Um data point is telling you and realize when to when to panic. And the thing that will make us all, should all panic, is when inventory rises, you know two, you know, Oh six, oh seven levels, maybe even oh five levels. Is something that we should be worried about. And when, you know, you start seeing new bills being delayed because builders are not putting out new deposits. Those are two things that can be tracked, one easier than the than the other, but those are things that are actually to worry about, whether or not margins decrease or whether or not interest rates go up or whether or not, you know, days on the market, you know, go up. That’s just that’s just noise. It’s not actually telling you about the underlying health of the housing market, which is unhealthy because we don’t have enough homes. But for those of us who are trying to fix that is a very stable, healthy basis for the next, sadly, you know, three to four to five years. Yeah, very fair, John. Thank you. You cut through the noise as always. Uh, always learned time when I sit down with you. Well, as I as I was saying to you at the start, we have a deal, right, so, if I’m right, we’re going to, you know, just keep playing this over and over for the next couple of years. And if I’m wrong, you have you’ve given me your word. Right, we’re gonna delete this. Nobody gets to see it. You know, we’ll. You know that. That’s that’s that’s how the best economists work, right, that’s how that’s how the Internet works. Right, you just pressed elete and it’s gone forever. So we absolutely will do that. Uh, you’re you’re a super smart guy. So fingers crossed everything pans out. But Yeah, interesting times and Um, yeah, I can’t thank you enough, my friend. I truly any time I chat with you, whether it’s here, whether it’s the conference Um. I always, always walk way and more well informed human being, and that, to me, that’s the we do. We do our best and again, we you know, we’re we we love sort of working with you guys. I think it’s it’s it’s great to have that sort of relationship where we can look at things together, discuss the market together, you know, keep ourselves in check, you know, and it’s it’s always good to to, you know, hear things you don’t agree with or to hear our perspectives, and I think the sort of Satanta Leva one connection and you know, really gives us that difference where we can, you know, offer something that you know, gives both of our inputs and both of our perspectives, as opposed to allowing you one view to to dominate the other. So we’re we’re very appreciative of of that. Always love talking to you again, genuinely love listening to your podcast as the most of my most of my team. I think it’s a it’s a great listen and a very valuable tool and, you know, congrats on the continued success and may you have more. Thank you, sir. Thank you, sir, too kind and anyone listening, please do check out Satanta, s e t a, N T A and John Curry, CEO. Thank you again for joining my friend. No problems are have a good thanks everybody for listening to take care. Are you a real estate investor looking for the right lender that can finance all your deals and help you scale? Lima one capital has the best suite of loan products in the industry bar none. Whether that’s fix and flips, fix and holds, building new construction or buying rental properties. They have incredible financing solutions for it all. A reliable, common sense lender is one of the most important parts of your investment team, and that’s exactly what you get with Lima one. Let Lima one capital show you how they’ve helped thousands of real estate investors scale and increase their wealth. CHECK OUT LIMA ONE DOT COM or call eight hundred to five nine zero, five nine five to speak with a consultant and preparation for your next project. Thank you for joining us today. On the real estate of things podcast. Subscribe and tune in weekly for new content from the industry’s…

00:28:03 – 00:28:15

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