What Matters in Residential Real Estate (With Dolly and Jenny Lenz)

KATHY JONES: I'm Kathy Jones.

LIZ ANN SONDERS: And I'm Liz Ann Sonders. 

KATHY: And this is On Investing, an original podcast from Charles Schwab. Each week we analyze what's happening in the markets and discuss how it might affect your investments.

LIZ ANN: Welcome back, Kathy. How has your past week been?

KATHY: Well, I've been pretty busy. As you know, fixed-income markets continue to be on a bit of a rollercoaster. We've had all the messaging from the Fed, which was a bit of a surprise for some after the Fed meeting. Fed Chair Jay Powell indicating that, you know, they were going to take a slow approach to rate cuts in light of the economy's resilience. And then there's the ongoing attention to the Treasury's issuance schedule.

Personally, I feel that that's somewhat overdone, but it's an issue people are on top of and keeping an eye on. And then we've had the banking-sector problems, partly due to commercial real estate. You can see the impact of regulators now kind of pushing banks that are at risk to cut their dividends and raise capital, but all that, of course, creates a swirl. 

So I've been pretty busy. The good news is at the end of the day, we haven't changed our view that the Fed's first rate cut will likely take place in May, and we are still expecting three, maybe four rate cuts of 25 basis points each this year. That, fortunately, is in line with what the Fed is saying, so we weren't too shocked, but it does mean I think this volatility stays with us for a while. 

So how about you, Liz Ann? You've probably had a lot of surprises since we last spoke as well.

LIZ ANN: Indeed, and like you, I wasn't surprised that the Fed pushed back against a March start to rate cuts. That had been our collective thinking. It just didn't seem like the data was supportive of it and there had already been some sort of pushback through various Fed speakers on the notion of that. So not a big surprise, but clearly markets were surprised. And I guess to me, and we're starting to see it now, what was more interesting was the fact that although the start date got pushed maybe to the May or June meeting, at least initially there was still the same number of cuts expected. So just a later start, but the necessity of more aggressiveness once they did, and that has now started to shift. I also thought, you know, Powell did that interview on 60 Minutes following the FOMC meeting, and I guess the one thing that I took from that was, and I don't know if it's truly a shift in emphasis, but he talked a little bit more about the 12-month rate of change of inflation as it relates to their target, where in the past, if he cited a period like that, it was more a six-month rate of change. Maybe that's just on the margin a shift, but that was something that I noticed. 

And of course, we're right in the throes of earnings season now, now getting into the back half of it. And the typical metrics that everybody focuses on, like the beat rate and percent by which companies beat, are not unimportant in this environment, but I think it's the details around those and the outlooks that are maybe in sharper focus. The beat rate has been better than expected on bottom line, but interestingly, the top-line beat rate, revenue beat rate, is about 20 percentage points lower than the earnings beat rates, about 82-62. And that 62 is no better than in line with the norm.

Whereas earnings have beat by a factor on average of between 6 and 7%, the revenue beat rate is only about 1%. So that really has brought profit margins into sharper focus. And I think companies that have excelled at that cost-cutting and maintaining profit margins are getting rewarded, but you are starting to see, again, a pickup in some of these high-profile layoff announcements as companies look to either boost margins or protect them via what, in many cases, is cutting of their largest cost component, which is labor. So that's something worth watching. 

And also, some interesting things going on under the surface of the market recently. You've had the indexes staying fairly healthy, S&P 500® and NASDAQ not all far from all-time highs, but much more deterioration under the surface. That's sometimes called distribution in breadth or technical terms, where a month or so ago, you had the S&P, 90% of its stocks were trading above 50-day moving average, and that's down to somewhere in the 50s. It changes on a day-to-day basis. So I'm not going to be precise given that we tape this. But so just some underlying weakness that is to some degree masked by what's happening at the index level and even within the group like the Magnificent Seven, which has obviously dominated headlines and performance, that is starting to show some dispersion, too. 

In fact, a couple of days ago, I looked at just the ranking of the seven in the Magnificent Seven in terms of year-to-date performance. And one of them was at the very top still, and that's NVIDIA, maybe no surprise. The other one was literally dead last: Tesla. So even within that group, you have a much wider dispersion. I think it's something that investors are going to increasingly be aware of. 

KATHY: Yeah, I've heard people referring to it now as the Magnificent Six …

LIZ ANN: Or the Sensational Six since we like to be cute with the same letter. So that was the one I've heard, seems to resonate, and it's just all but Tesla. And interestingly, Tesla's still in the top 10 of size, but it's not the seventh in terms of size anymore. There are three stocks that have actually leapfrogged: Broadcom, Berkshire Hathaway, and Eli Lilly actually have leapfrogged Tesla. So if you're being pure to the Magnificent Seven, it no longer includes Tesla if you're ranking them by size.

KATHY: Gotta stay on top of it. That's all, like, I'm glad it's you and not me. It's a … 

LIZ ANN: Well, ditto. Yeah, I say that about you all the time with regard to the bond market. Like I always joke when Schwab brought you into the mix, I was thrilled because that was when I got to stop pretending like I knew much about the fixed-income side of things. As always, I'm appreciative.

KATHY: I can honestly say I know nothing about stocks. Whenever people ask me, I just say, "I have no idea what's going on over there. That's Liz Ann's turf. Let her handle these questions because I have no idea what's going on."

LIZ ANN: Well, we're not really talking about either stocks or bonds in the next segment here on this episode today. I had the chance to sit down and talk real estate, residential real estate, with two people I've known for some time. And they really are experts in the field. 

In fact, for many years, Dolly Lenz, one of our two guests, was literally the top residential Realtor in the entire United States. She literally sold more properties worth more money than anyone else in the country. And I think the number is something like $12 billion in sales over her career. She's just had a storied, storied career and now has her own firm called Dolly Lenz Real Estate. And I think this is kind of cool, having a daughter, although she's not in my business.

But Dolly recruited her daughter Jenny to join the family business. They're both regular guests on Fox Business, CNBC, Bloomberg TV. Dolly has been featured in the Netflix series Billionaires: Explained, among many other TV appearances. And you can read more about her on her website, and it's fascinating. DollyLenz.com, and that's L-E-N-Z. And you'll hear—she might be a mega-broker to the stars and the ultra-high-net-worth crowd—but this gives her visibility into the overall real estate market. She's got a great handle on the data, and I was eager to get her point of view on where things are headed for 2024.

KATHY: That just sounds fabulous. You know, I'm really looking forward to it because she is such a big name in the in the industry and such a fascinating person. I think that's going to be a great interview.

LIZ ANN: Well, I am so happy to have my friends Dolly and Jenny Lenz on the podcast with us. I'm really tickled that they agreed to do this. There are not more expert voices in the world of real estate than these two.

But before we get into what I know will be a really interesting conversation, Dolly, I'm trying to think of how many years, maybe it's not decades, but how many years ago you and I met. It was more recently that I got an opportunity to get to know your fabulous daughter, Jenny, actually here in Naples where we all are recording this. But it might have been, it could have been, could it have been 20 years ago, Dolly, that you and I met?

DOLLY LENZ: Yeah, your friends in Austin were asking us earlier, and I said, "It's about two decades." And I told them that we met at Cipriani and that Peter Scaturro, who was the head of Goldman Sachs Private Wealth, and other positions, introduced us at dinner.

LIZ ANN: That's right. And you were with Douglas Elliman at the time in New York?

DOLLY: I guess 20 years ago put me at Douglas Elliman, correct. That was 2001 when I left Sotheby's and went to Elliman.

LIZ ANN: Yeah, so go back to the beginning for you and then weave it into what you and Jenny are doing now and how you, I don't want to say, roped your daughter into this. I would have to rope my daughter into anything that I did, but you two are such a joy together to observe and listen to, so I'm not sure if that's the right term to use. But just give us the history of when you started in the business and just the cool thing that you're working so closely now with Jenny.

DOLLY: I started around 1985, '86, and I went into it purely by accident. My husband and I were buying little studio apartments. You know, live in one, rent one out, sell one. And we were doing that for a while at that point.

And I was an MBA, CPA kind of background. And he said, "Why are you doing what you're doing? You don't like it. Do that." And I said, "Well, I have mortgages. I can't afford to just do that and pivot to that." And he said, "Just do it. You're doing all the work on all these deals. They're getting paid. It's silly. Just do it."

So I did, and I was very fortunate that, you know, immediately went, you know, selling 60 studios in, I don't know, a couple months, and then 90, and then just crazy numbers.

And no one wanted to work with a studio buyer because the numbers were too small. So I did all of that heavy lifting and was remunerated well, as well as learned everything very well. And then somebody told me, "Hey, you should do big apartments while you're doing studios." And long story short, I went on to big apartments.

During that timeframe, I had one big client, who was Barbara Streisand, because her attorney worked with me when I was in finance. And he said, "I only want Barbara to work with you. Please just take her under your arm. I know you're new. I don't care. I trust you. Just do it." And I did it, and she was a client for 19 years till she moved out of New York. But that was kind of my claim to fame because I was followed by the press as a result of having her as a friend and a client.

Anyway, long story short, went on to go to Sotheby's. I was recruited by Sotheby's to work there, ran their international department. And when Sotheby's was not a franchise, but in fact was the auction house, and we were the offshoot of the auction house.

And from there, went on to join Douglas Elliman. Andrew Farkas asked me to join him in 2001. And in 2001, I sold Prudential the Douglas Elliman brand. You know, long story, but a fun story of how that all happened. And it was like my first kind of buyout deal that was a major deal. So it was great fun.

And I went on to stay at Douglas Elliman, becoming vice chairman. And then thought, "You know, I really want to do my own thing, make my own rules totally," and left Douglas Elliman in 2013 and started my own firm.

Now Jenny was an investment banker, and you know, those hours are horrific.

JENNY LENZ: It was a hard sell, being in the office till 4 in the morning. She would actually bring me a pillow, because I worked at Barclays at the time after graduating college. She lived about 10 blocks from 745 7th Avenue. We actually called it Club 745 because all of us at the time we were going to the clubs for those two years after college. We'd be actually at the office. So Club 745 at 2 in the morning.

I worked in industrials. I did really like it. I learned a lot. And it wasn't a hard sell, like I said, to move to real estate. But it's good because I learned the financial part of things, all about stock market, all about companies and how to sell one to another, you know? So it was a great experience for me, but I'm really glad, and my mom and I are very close. So …

LIZ ANN: And when you two started it, was it mostly in the New York City area? And when did you branch out?

DOLLY: I mean, we were always everywhere, so we followed the client. We think of ourselves as a private bank model versus a regular real estate model, and we follow the client. So our client wants to buy a big house in Beverly Hills, we will be the advance team. We'll go there. We'll look at 20 houses. We'll talk to the brokers. We'll check out the communities. And then we'll say to them, "Look, we saw these 20. We think these eight might be of interest, you know, don't want to waste your time. Why don't you come look at these eight with us, and then we could talk about that. If none of those are any good, obviously we'll come back. We'll keep doing it until we find you one." And that's what we do. So we've done that really forever.

JENNY: Right, and it makes a lot of fun, right? Because we get to learn all these different markets. We travel all across the country giving speeches, even to Australia. We've been, I think, three times speaking to their version of the National Association of Realtors, right? So it's called AREC, the Australian real estate board over there. And, you know, we get to see all of these amazing places, meet all different kinds of people, learn from the way they do business, and basically meet people all over the world who we can refer business to and vice versa.

LIZ ANN: So thinking back to your start, Dolly, in the mid-1980s—what do you think represent the most significant changes, just in the broad landscape of residential real estate, be it in the more metropolitan areas or more broadly than that, either how transactions get done or the nature of purchases or just the clients—what are the most stark differences from your start in the industry to now?

DOLLY: Well, a big difference is who the clients, like you said, are. So the clients then were doctors, lawyers, professionals, CEOs of companies, and that went all the way to becoming, you know, I haven't had a doctor as a client for a very long time, nor an attorney. You know, now we're seeing only CEOs, only VCs, only private equity guys, right? So it all changed from that normal "mom and pop" group to these people that we've all read about and heard about being the clients versus the normal "mom and pop" doctor, lawyer, et cetera. So that was one huge change.

Another huge change is information. So when I started in the business, my biggest, I guess, special sauce was the fact that I had the information. There was no real MLS to speak of, and in New York there still isn't one. But there wasn't any kind of an MLS. So if you wanted to know what was for sale, you had to call a broker or open up a very thick section of The New York Times real estate section, right? Which went from maybe 40 pages to two pages because now the information's all out there dispersed by Zillow, Realtor.com, and all the other brands.

So the opening up of the information and the disintermediation of real estate brokers is honestly the biggest change from then till now, which is why now National Association of Realtors has 1.6 million members, where then it could have been, you know, 100,000 members. So very different landscape.

JENNY: Another couple of things aside from, you know, the market obviously goes up and down, but for the most part, at the beginning of my mom's career, she was lucky that the market was going straight up, right? So very often people would buy another apartment before they'd sell their current one, right? Now we really don't see that. People are like, "No, I need to sell. And then I'll think of buying afterwards," right, because the market was going up.

Same thing with new construction. People would buy a unit, and then the developer would have an increase in pricing that would scale. Let's say 5% every two months or depending on how many units have sold. Now, a lot of the times you see that pricing actually goes down as the building is being built, because the developers want to get rid of their end units, right? So the economy really has slowed a bit, and people are quite nervous now, which I guess we'll talk about a little bit later.

LIZ ANN: How dramatic has the pandemic been when you think about pre-pandemic, post-pandemic, whether it's the way buyers and sellers approach you, what they're looking for, you know, vacancy rates, pretty much every metric we've seen at the national level, just such a dramatic difference, existing homes versus new homes—what do you think are the most stark differences as you think in that binary pre-pandemic, post-pandemic analysis?

DOLLY: Well, the primary thing is location, right? So before it was big city, big city, big city. Everybody wanted a home, primary, second, third, fifth in a big city. So whether that's Los Angeles or New York or Chicago or wherever that might be, that completely pivoted away from big cities to "Where will I be safe?" Is that Southampton for New York? You know, is that Naples for Florida, you know, versus Miami perhaps? And is that some small area outside Los Angeles versus the general big city where people always went? So I think that changed, and that's why places like Naples or Southampton or many others went up in price so much because everybody flooded there. So supply/demand, right? Huge demand is going to force prices up.

JENNY: Right, so in Naples, Miami, Palm Beach, in Florida, prices have doubled or tripled in a lot of cases, right? And like Dolly said, in big cities, things are pretty stagnant, and are going down, if anything, especially cities that have been plagued by homelessness and crime. But yeah, so we're seeing people wanting to move to safe areas.

Like, we're doing this podcast from the office or home. We can really work anywhere, which is also a huge paradigm shift from before, where you just wanted to roll out of bed and be in the office in Times Square or wherever you worked in your downtown metropolitan area, right? So it gave people a chance to move away from the city centers and really explore new areas over COVID.

LIZ ANN: You know, speaking of the downtown areas, and I know you guys know everything about New York City, one of the things I keep a close eye on, and track, is office occupancy. And one of the common ways to do that, and I'm sure you're well familiar with it, is the Kastle Systems, Kastle with a K, the electronic entry in and out of buildings. And they have them all across the country, so you can look at all the major metropolitan areas to see and know the shift away from everybody working remotely to some form of hybrid. And it varies, interestingly, from industry to industry, company to company, and city to city. Last I saw, New York City was sort of at the 50% point. Tell me what your thoughts are on that, sort of life of day-to-day going to work, coming back to New York, and if you have perspective on other cities, whether we're in some new normal now, or whether industries and companies are still kind of figuring out what the mix is and what that means for office space, but also people who want to live in the city where they work.

DOLLY: I think a lot of people do want to have a city place. It's a question of, "Where is the primary place?" So we're finding a lot of people in financial services of all sorts, even though the banks are saying, "You have to come to work," you know, if they don't enforce it, nobody's coming to work.

JENNY: Right, it would stand to reason that all of the CEOs and all of the bosses want their employees to come to work, right? And that's also good for the economy. And you know, you go out to lunch downtown, you know, in Manhattan and whatnot. So it is a good thing for people to go to work. Obviously, we think face time is very important, but I think we do think it is a new normal where people, even though employers are going to want employees to come in, I think that a lot of employers would rather pay their employees a little bit less or do what they have to do to allow them to work from home.

And like Dolly said, you know, you could have a house in Greenwich or somewhere further away from Manhattan and then maybe keep a small apartment near Grand Central, if you will, to be able to go to work when you need to. But I definitely think it's a new normal where people will want to work from home. And it is often argued that you are more productive, obviously depending on which side of the aisle you are on that, you are more productive, right? Because the average commute, I think, is about an hour in the U.S., to work. And, you know, in that hour, you can work from your pajamas.

LIZ ANN: So assuming we stay in some version of new normal and occupancy—and again, I'm focused on New York City here, but I think it's a pretty good proxy for a lot of large cities around the country—you know, a lot of discussion, especially in a place like Manhattan, about, all right, if companies do downsize their physical space, what happens to some of these office buildings? And it's been interesting around the country where, you know, beleaguered malls have shifted their focus away from just retail to live-work spaces and amusements and even, you know, indoor pickleball courts. In Manhattan, some office buildings, and this has happened downtown, that were maybe some of the older office buildings that are converting to residential.

So what are some of those trends you're seeing in New York, and is it matching what you're seeing in other big cities as the whole city area rethinks its space and the division between commercial and residential?

DOLLY: Well, if we just look at San Francisco, let's say, right? Or New York—San Francisco, what we're finding is the owners of real estate are giving back the keys, right? The big buildings are giving back the keys to the lender. And the lenders are selling the real estate, I guess, at or below market value because they're trading, right? All of a sudden, buildings are trading. And I think that that will need to play out—what actually happens to those buildings now that they've traded?

I think in New York, like you cited, downtown they converted a couple of buildings or in the process still of converting a couple of buildings. We don't see that trend as workable because of the floor plates of commercial buildings, where bathrooms are, plumbing, et cetera. We've walked many commercial buildings with people to see if we could find a way to convert it, and we don't see that as happening. So it's going to be very interesting how that plays out. Maybe that turns into some sort of hybrid—retail on one floor and things that aren't traditional offices. And then the retail, like a Macy's, gets converted to build gorgeous, luxurious condo building or something like that. But the offices are going to have to pivot to something. And I think it's going to be more like, "OK, so now we can put a retail—from 42 to 47 will be retail. You'll go to Macy's on those five floors." And other uses that are similar to that, health clubs could be in there. It could be all kinds of things that they aren't now—restaurants, could be anything, but it's not going to be offices.

JENNY: Yeah, and like Dolly said, it really doesn't make sense 99% of the time to turn commercial to residential just because, as simple as where the bathrooms are going, right, it's just too expensive. The numbers do not pencil out. But a lot of things like gyms, like anything experiential, right, which people do want to go to, and a lot of malls—this was a problem years ago. A lot of malls are turning into gyms and other kind of commercial uses.

But New York is fortunate in that we are the center of the financial universe. And a lot of other places don't have … like San Francisco doesn't have that. You can say they're a tech hub, but all of the banks are not there. So everything else I think will suffer more than New York will, but at the same time, we're going to have to figure out what to do with all that office space that, like you said, is at 50% capacity right now.

DOLLY: And is Miami going to take the New York financial crown, right, which they're trying very hard to take. I mean, I don't personally think that happens, but let me tell you, they're working at it. So if we don't work hard back, we're going to lose it.

LIZ ANN: Yeah, I mean, there certainly have been some high-profile, you know, financial hedge fund, even outside of finance that have shifted either their, you know, personal headquarters or their corporate headquarters to other parts of the country. But then, you know, a place like New York is always going to have an appeal. It's, you know, I'm originally from there, so I'm a bit biased, but …

JENNY: As are we.

LIZ ANN: Yeah, I know. Haha.

JENNY: Haha. Big fans.

LIZ ANN: You know, another interesting thing that has happened broadly around the country with the significant move up in mortgage rates in this tightening cycle by the Fed is you started to see this huge divergence between what was going on in the existing home market and what was going on in the new home market because many existing homeowners had locked in, had taken advantage of what were extraordinarily low rates. And therefore, maybe to use a really simple word, they were sort of stuck. They didn't have that incentive to sell and buy again because they would be subject to higher rates. So it really meant all the action in the last couple of years, if not, you know, most of it I should say, is in the new home market. We're starting nationally see a little bit of opening up and a little more activity in existing.

So in your world, what are your thoughts on that sort of impact of mortgage rates, changing maybe percentages of folks that use mortgages to buy a home or cash buyers, and then what we're seeing in existing homes versus new properties?

JENNY: Right, so the impact of mortgage rates increasing has been huge. Home sales last year dropped to the lowest level in three decades. And we're hopeful that last year represented a bottom in sales activity. The good news is that home sales trigger financial activity, right, in that lawyers, real estate professionals, designers, carpet cleaners, Home Depot, you name it, benefit from transaction volume, right? So we're hopeful that transaction volume will increase this year. But the mortgage rates have really caused almost a standstill this past year.

Basically, what we were referring to earlier was, we call it "golden handcuffs," right? The problem is that no one can leave their homes because should a Boomer want to sell their house, it doesn't really make any sense because they'd have to buy a smaller home or a small condo, let's say, for the same price because they locked in those low taxes if they're on assessed value, and the low mortgage rate, right? So that's why it's been a really bad market for real estate.

DOLLY: Yeah, terrible market for real estate, as she said, that in 30 years, as Jenny said, we haven't had as low a volume, right? 4.09 million houses traded, which is, you know, we really need a healthy market would be 5.6 million. So we're talking so well below what it should be. And there's a lot of buyers out there. So it's not a lack of buyers, not a lack of demand. It's a lack of supply.

And even where there is a supply, the numbers are so high, a lack of affordability. So really affordability is also at an all-time low. Even now that our interest rates are a little, you know, clocking down just a bit, it makes a $200-a-month difference on average sales price of a house of $363K, let's say. So it's $200 a month you save. That'll pay for utilities. That's all great. But you probably also gain $200 a month in value of the house, right? You're going to pay more. And like you said earlier, Liz Ann, once you sell, all the transaction costs kick in. All the taxes kick in, right? So yes, if it's a house that's over $2 million, you'll save some money on the $500,000 exemption, federally, but there's lots of other taxes. You know, it really doesn't make sense for most people, is the problem.

JENNY: And if your house appreciated so much—let's say you bought your house in 1960, and it appreciated a million, two million, you can only write off $500,000 as a couple, right? So you're paying all those taxes on, let's say, $1.5 million. It really doesn't make any sense. And like Dolly said, with all the other transaction costs, you're basically paying more if you're trying to downsize. So who's going to do that?

And then anyone on the first-time home buyer level can't afford a home because of these high mortgage rates. And it's not only real estate, right? It's gas, it's food, everything's more expensive. So people are really struggling out there.

LIZ ANN: Yeah, I mean, and that's that, you know, that last point is important because when you think about the sort of pillars of housing affordability, mortgage rates is obviously one and home prices. But then it's also the income you're generating. But there's the nominal income, your wages, your salary. But then there's the real income or wages and salary, which is a function of how much of that is eaten up by just generally higher inflation. And we unfortunately, at the worst of this, had all three pillars under housing affordability working not in favor of folks. You're getting some reprieve on mortgage rates, but you're still struggling in the rest.

If you think about the country and places where you have conducted business, is there any area that's, you know, glaring on the "This market is just ridiculously overvalued," or "Boy, this is an incredibly undervalued market that I think has some real growth opportunities," or is everything sort of a little bit of a mix?

DOLLY: You know, it's funny. So if you look at, let's say, San Francisco real estate market, and we're talking now residential—you know, the problem is the sellers don't need to sell. So while the market value might have dropped from, let's say—you take a $10 million home or more—might have really dropped if somebody were to buy it to half of that. The sellers aren't selling. They're staying there. They're saying, "I don't need to sell. I'm keeping it. I'll rent it if I have to." And that again hurts the transaction value because the sellers aren't willing to take a loss. They're just not. And a lot of sellers, New York, San Francisco, cities like that, are just saying, "You know what, so I won't sell." And that's, again, further hindering the whole real estate market from moving further.

JENNY: Yeah, the huge headline, I'd say, is, "low supply all across the country." And what does that do? That keeps pricing high all over, right? Obviously, like we said, places like Florida and Texas and places out of city centers did increase a lot since COVID. But other than that, just all across the country, people cannot buy a home. That's the problem, because all these Boomers aren't leaving, and then the people can't afford to buy a home that are at the lower end.

And based on data from the end of December, the current monthly sales place implied 2.3 months of housing inventory, and most economists consider a balanced market to offer six months of housing inventory. So it's really a supply problem that we're having, which is why pretty much everyone is at a standstill.

LIZ ANN: So you know, there's so much uncertainty now that's keeping things at a standstill. But when, as you think about beyond the near term and the uncertainty with regard to Fed policy and mortgage rates, do you see an increased investment cycle on the part of home builders or apartment builders to start to solve this problem of limited supply? Could that be an upcoming secular trend of adding supply to a very undersupplied market?

JENNY: Right, well, home-builder sentiment always surges with lower mortgage rates. I mean, Lennar and D.R. Horton were up about 60% in 2023, and Pulte Group was up 130% last year when the benchmark S&P was up about 20%, to give some perspective, right? So we do see home builders wanting to build. It's just that their numbers have to pencil in as well, because like we were saying, with inflation, everything's more expensive—the wood, the steel, the people working and doing everything with the wood and the steel, right? So hopefully the home builders will do well, which we do see that happening this year.

DOLLY: Well, new-versus-existing is generally 10% versus 90%. So it really can't be enough, right? I don't see that ever catching up. There's not a possibility. And all the cities have zoning issues. You have to get so many governmental approvals. People have practically given up building in California. You know, they're like, "I'm not going to build there. There's just no point. I have to wait four years to get something approved. How much money do I have to outlay in those four years before I get this done?" And they can go to other cities, so why do that, right? So it's going to keep everything at a low pace.

JENNY: But of everyone, we think new construction and the home builders will do better than everyone else, because they have the breadth. And they can offer mortgage rate buy-downs. They can give you discounts on close. They can do a lot of things that the individual seller cannot do. But we don't think that they're going to be able, like Dolly said, given that they're 10% of the economy versus 90% of existing home sales, we don't think that they're going to be able to do enough.

LIZ ANN: Yeah, and you know, you both talked about month supply, which is quite low. What about shifts recently, particularly in the post-pandemic era, of time on the market? Is it taking longer to sell once somebody decides that's what they want to do?

DOLLY: You know, New York, it's such a big number that everybody keeps trying to figure out a kosher way to reset the number, right? You change firms, you change brokers, you do something, and you try to time it out that it's no longer so long on the market. The last time I looked, I believe New York was 803 days average time on market. So either you have to ignore it and discount it, or you have to say, "Well, some of those numbers are really made up," because the ones that say 60 days actually are on the market five years. It's just that they reset it somehow.

JENNY: They change the apartment number or do something, but it is taking a long time in big cities for things to sell, much to the chagrin of some of our sellers. But in places like Florida, time on market is much lower, especially over the pandemic. It is getting a little bit longer now because prices have doubled and tripled, right? So people are not really entering the market at these prices. So it is taking a little bit longer, but still New York is a disaster in terms of days on market.

LIZ ANN: Yeah, I just I just happened to look earlier today, and it was very recent, it was an article out in the last five days, and it was fastest-growing sales price, and they did a top 10. And maybe no surprise, three out of the top five were Florida. Naples actually wasn't one of them. Sarasota was number one, Miami Beach was number two, and then West Palm Beach was number five. But three out of the top five were Florida.

DOLLY: Well, some place like Naples is small, right? So it's hard for it to be, probably if they're doing it based on transactions, hard for it to be part of top five, I think. But it's always top in terms of increase in pricing. Port Royal's an example, right? You could have purchased a house for 4 million, and today that same house would be 11, 12. Those numbers are unsustainable, right?

LIZ ANN: Yeah.

JENNY: So if you did buy a home for $4 million, right, in Florida, taxes are based on purchase price. So in Naples, they're about 1% of purchase price. In Palm Beach, I believe they're 1.8% of purchase price. Miami is 2% to 2.5% of purchase price, whether you're on the water or not. So it does make a huge difference to people, right? So if it's $4 million in Naples, that's $40,000 a year in taxes. And if it's $8 million, that's $80,000 a year in taxes, right? That's a very big difference. So it's not only the purchase price, right? You're losing out on that $4 million if you buy the home a year later. It's also yearly impact, right, $40,000 versus $80,000 in taxes. I mean, New York and other places are based on assessed value. So that's a little bit different, but it really does matter, the purchase price in Florida. It really does impact the affordability.

LIZ ANN: Yeah, and even within Florida, as you mentioned, big differences in that percent of purchase price, depending on what part of the state you're buying in. 

DOLLY: Yeah, and we're still seeing a lot of migration, you know, from the Northeast to Florida, to Texas. You know, we're representing a property in Houston right now, you know, a 7 million-ish property in a prime building in Houston. And I have to tell you, you get a lot more people there than you do in New York coming to look at it. And taxes do matter, right? So we're talking about income taxes. And income taxes do matter. Whether there's an estate tax in your particular state does matter. 

JENNY: And people are smart, right? They're doing their homework before they actually pull the trigger. And that's the best way to buy a home. We always tell people two things: "don't fall in love," because you'll overpay, and "do your homework," right? Go look at those open houses, hoping that mortgage rates do drop. And NAR, the National Association of Realtors, is predicting mortgage rates to go down to about 6.3% by the end of the year, and that's a big difference to people from the 8% we were seeing, right? Which is so shocking. 

And the most important thing about, you know, considering whether to buy real estate is job security, right? I mean, people aren't going to be buying a home. I don't care what the mortgage rate is. I don't care if it's 3% or 8%. If you're not going to have a job tomorrow, or you feel you're not going to have a job tomorrow, or the guy next door, you know, got fired, you're going to be hesitant to buy a new home. So I think that's super important to look into 2024 because people are announcing major layoffs. So it's kind of a scary time.

LIZ ANN: Well, I love chatting with you two. We often will get together socially and chat about things other than just real estate. But I love having this conversation with you because you both are truly experts and, I think, bring a fresh perspective to thinking about how this whole industry works and what matters and maybe what doesn't matter. So I just want to say thank you for sharing your time with us on our relatively new podcast.

DOLLY: We're so excited to be here with you, as always. You're the best. Thank you, and we look forward to seeing you on TV later today.

LIZ ANN: Haha.

JENNY: Thank you so much. See you later.

LIZ ANN: Thank you both.

KATHY: Thanks, Liz Ann. We know that interest rates have had a huge impact on the real estate world, so that's definitely something we're going to keep an eye on from week to week. So for the next week or so, what do you think our listeners should be watching?

LIZ ANN: Well, both CPI and PPI come out. I would suggest that inflation reports are fairly important these days. The NFIB data comes out as well. That's the National Federation of Independent Business. It's all the small business details. And there's an overall index reading, but I think a lot of the details, some of the sub-questions, are important too. Retail sales come out. That obviously gives you a sense of the health of the consumer. And then you've got some inputs into recession-type decision making like industrial production, leading indicators. Speaking of housing, you get building permits and housing starts next week. And then to, I think the end of the week, we've got the University of Michigan data coming out, which covers things like consumer sentiment, but also inflation expectations, which has been in focus for the Fed. How about you?

KATHY: Yeah, all those things. Obviously, the inflation report's very important for the bond market. We'll be keeping an eye on that. We have loads and loads of Fed-speak to deal with. So now that the meeting is over, before the quiet period ahead of the next meeting, every member of the Fed will have something to say. And so we'll kind of have to keep an eye on where the various members are in terms of their thinking about policy.

And then I'm keeping a really close eye on this banking situation, simply because we know that the regulators are very concerned about it. We know that the Treasury is very concerned about it as it affects what they're allowed to do and what they can do. And of course, it affects the markets as well. So I think that that's a backstory that's becoming a front story right now and we'll be keeping a close watch on that.

LIZ ANN: Yeah, Kathy, I mean, the broad subject of commercial real estate and what's going on with the New York Community Bank is obviously in sharp focus, and I've been getting a lot more questions about the whole world of commercial real estate, so, I think the timing is absolutely perfect because next week we're going to focus on that. I'll be speaking with Al Rabil, who is the founder and CEO of Kayne Anderson Real Estate, truly an expert in the whole commercial real estate area. And I think he has a really interesting and very broad perspective. So I think the timing is perfect. We lucked out with that one. 

But for now, we're going to wrap it up. As always, everybody, thanks for listening. Be sure to follow us for free in your favorite podcast app. And if you've enjoyed this episode, tell a friend about the show. Leave us a rating or review on Apple Podcasts.

KATHY: And as always, you can follow our latest updates on X, formerly known as Twitter, and LinkedIn. I'm @KathyJones—that's Kathy with a K—on Twitter and LinkedIn.

LIZ ANN: And I'm @LizAnnSonders—Sonders is S-O-N-D-E-R-S—on Twitter, or X, and LinkedIn.

KATHY: For important disclosures, see the show notes or schwab.com/OnInvesting.