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Here is just the headline that just basically writes itself, Golden Goldman boosts Solomon's paid twenty four percent after firm's profits slumps twenty four percent. I meant beautiful pay for performance When I saw that headline, I figured it has to be the work of Schreieden on o Rogen because he covers Goldman Sacks like no one else out there, and we're kind of have to get a few minutes
from Shreeden, not a Rogen Bloomberg News. So Shree Goldman Sacks boosted David Solomon CEO his compensation twenty four percent to an even thirty one million dollars. Good for him for a year when earning slumped at the Walls Tree Giant. What's the story behind this?
It's interesting, right because for years we've always heard, and we always keep hearing that it's a pay for performance culture on Wall Street. But it is fascinating how some of these numbers come together. It's not science. It's always hard, you know. Sometimes you look at what happened in the year. Sometimes you look at what happens in the forward. Goldman's compensation committee, the board said there were a lot of strategic changes that were made in twenty twenty three. That
is true. Solomon had initially leaned in on his retail banking aspirations for the Wall Street Giant, then tried to unwind it and spend much of the last day focused on that so that they're well set up for twenty twenty four and beyond on a strategy that resembles the Goldman sacs we've known for the last twenty twenty five years. The board is saying that means he deserves a big race.
The number is a bit poetic. A twenty four percent jump when the profit is down twenty four percent to just go with it that twenty.
Four years ago. If we just go to so it's getting a twenty four percent increased to do what they did decades ago. How do we think people inside the bank feel about this?
I had been talking to a number of people even before the filing hit, and everyone was laser focused on what the number was likely to be. Remember, he took a near thirty percent cut last year when his pay was down to twenty five million dollars. That sounds like severe punishment, but that year profit was also down significantly
in the forties. Everyone this year was focused and interested to see if he actually hit the thirty million dollar mark again, because it is fair to say, across the top ranks of Goldman sacks, most people did not get a twenty five percent jump. Their paid did not increase by a quarter. So they were focused on this. And one of the interesting parts is last year the pay announcement was made in January. Goldman has this habit of gathering it's roughly four hundred or so partners the top
rank of the firm for this annual offside. They've been doing it in Miami for the last couple of years, and last year it came out in January before the pig disclosure came out before that meeting. This year, the pay disclosure was made off to that animal off side, which is interesting in itself.
You know, I'm just trying to look for a benchmark comparison here, and I almost look at the Bloomberg terminal for Jamie Diamond, and what we have disclosed is his twenty twenty two compensation was a total of about thirty two point eight cash and non cash. It the stock has actually gone up since then, so the pay package has gone up, but just on the march, just on the margin for twenty twenty two, thirty two point eight.
So just to give you a benchmark of Solomons right in line with what I would argue a peer.
Would be, or more even Morgan Stanley and James Gorman, and.
James Gorman comes and even higher at the forty seven twenty seven million. It was James Gorman's last year, so some of the boats thinking there was the follow us for twenty twenty three, but also a little bit of a go away package. But remember Morgan Stanley also had a pretty tough year. The thing that does stand out about Solomon's pay is that that jump in pay that person't they jump is bigger than any other major US bank peer.
Oh, I'm sorry, you actually have it in your reporting. So we have the latest data. So last month JP Morgan Chase said it award a longtime CEO, Jamie Dimond thirty six million, dollars for the year of four point three percent from the year earlier. Morgan Stanley increased James Gormer's paid it seventeen percent to thirty seven million dollars, So that you've got the most recent numbers. I guess I don't know. I mean, what's the feeling for mister
Solomon his position within the firm. It seems more ten now.
I don't know.
It seems more tenuous than say, like at any time for blank Fine, or any time before for some of the processors.
Well, arguably, I don't know how comfortable Lloyd Blankfine would have felt in twenty ten to twenty eleven when he was facing those congressional inquisitions. That's much harder than any palace intrig that David Solomon has to deal with. I would argue his position, his standing, his quote unquote vibe inside the firm right now is perhaps better than any
time in the last twelve months. Okay, it feels like all the griping in the internal risks and everything that was going public with the firm has quietened down a bit. That doesn't mean that the path forward is going to be exceptionally clean and easy for David Solomon, you will still have to show performance, and you will still have to show that after a couple of years when revenue has been down because capital markets have been clogged up,
because you've had missus with your real estate investments. As you get past that, you can now move towards actually delivering on your financial targets. And that's important for Solomon.
All right, srenad Roger, thanks so much for joining A short notice there Bloomberg News on that Golvi sas pay just fascinating.
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Punomboyle, senior US e commerce and retail analysts. She joins us on Nike. Is it Nike or Nike? Do I have to say Nike?
No?
Like okay, so we don't do that.
Where are you?
I don't know.
Adidas or ADDI does? I know it's a family name, but anyway, okay, so Nike, thank you well. Slash about a two percent of its global workforce. That stock is down four percent. And typically if we see a company get its house in order and cut costs, the stock can go up on that. Not in the case of Nike. Punam, what's Nike's problem?
I think the problem isn't just Nike's problem. We've seen job cuts across the board in retail and a two percent reduction. While it sounds daunting and that things are getting weak, we think things are weak right. The top
line environment for retail sales is a little murky. We expect them to be conservative in their guidance when they do report results coming up, But remember that two percent of their workforce compares to We had eBay identifying a nine percent cut earlier this year, we had rent the Runway with a ten percent cut. We had Amazon. Over twenty seven thousand employees were cut in the last two years.
So this job cut news is, you know, while it seems that, oh my gosh, things are getting materially worse, I think it's just part of efficiencies in retail today. As a top line environment really is a little weaker than we think.
So what's the story for Nike? I kind of feel like Nikes everywhere. I mean, how do you move the needle for a company like Nike.
Yeah, so it's a fifty billion dollar brand, It's the number one sports for a brand in the world, and the bulk of its brand is footwear, which has given it some protection. I think moving the needle on Nike is really just about getting the supply chain right and really getting consumer trends to pick up across the globe. It is a global brand, so you can't have one region doing well and the other. Now, we need China to get better, we need Immia to get better, we
need things to turn around in North America. It's collective, so we do need to see improvement in consumer spending patterns to really drive material improvement here. They're controlling what they can, which is costs, right. They had a two billion dollar plan in place that they put in December, which will unfold over the next three years. But on the top line, we do need momentum in terms of
consumer spending to increase. The one thing that I'd say that would help them this year is sporting events, right, So I think as we see more sporting events come back to life with the summer World Cup in Paris this year, there is an opportunity to really create new product and innovation around that to drive demand up. But outside of that, you do need the broader macro to improve in all the regions that it participates in.
So Nike, though, as you were mentioning from other brands, it is the least bad, right, That's why they're only cutting two percent versus more. Am I getting that roughly right?
I mean it's a much smaller cut than what some of the other brands have done, though I wouldn't quantify as least or more, because you know, these cuts start and you don't know where they end. But we did see hiring ramp up in the pandemic to support digital orders from some of these online companies. So while their numbers seem bigger, they also probably hired more during the pandemic, which is just a reflection of things normalizing again.
I see, what's the competitive landscape for Nike kind of just laid out for us.
Yeah, so it is a larger sports for a brand. As you know, there is competition that is growing, whether it's through on Hoka all Birds. You know, there are other more niche, digitally native brands coming up the spectrum Adidas is coming back. We have new management team there and they're restepping and reaccelerating on the push for sports across the globe. So we think, you know, that gap that Nike had with Adidas had widened in the past
four or five years, but that could narrow. That said, we do think Nike remains a very solid player in the active or market and they will continue to maintain their dominant hush, especially in footwear. The one thing that I'd say that you know, where there's probably more room for others to creep in.
To Nike would be.
On the apparel side. The apparel spectrum in active r is open a little Lemon, All Birds on Even and Adidas, under Armor, Puma. You know, they're all able to take share in that market as no one player really dominates it with a high margin like they do in footwear.
So what makes like a footwear apparel in sports like a Nike or an Adidas or Puma, what makes that not discretionary? Like what makes that the must have? If I have the extra five bucks, I'm not going to buy the eggs. I'm going to buy this because it's not there yet, right, And that's kind of the problem.
Yeah, So I think the footwear is something it depends if you're a sports person, right and you're playing sports. Your basketball sneakers are going to wear out, your soccer cleats will wear out. You will need to refresh and get a new pair. But it's not even about the sports. We learned through the pandemic that the wardrobe has changed. It's become more casual and probably more balanced today than it ever was before. So in that instance, you'll see
people walking at conferences with active worst sneakers. Right, let's become a normal now, like you don't need those dress shoes. So people are dressing more uncomfortable where And that's a catalyst.
For Nikash And that's actually an issue for me. The men in suits with the the sneakers. Even even David Weston, who I have tremendous respect for. He sports that look and he does it looks pretty solid at to say, but I'm like, David, I'm just not sure that's your brand, and he says I can adapt.
He but like he would be the first one to say that he is not like a fashion icon. So I mean, let's let's put that out there.
For sure.
It's comfort, it's it's definitely a comfort. I'm looking at these two guys here. They're not wearing sneakers though, although John Tucker is wearing one of his shoes that aren't dressed. He's apparently two pairs and this is the non dress shoe. Correct.
No, it's a sketcher.
So that's okay, there's a sneaker. Okay, it's Friday.
That's what Otherwise Paul would yell at me because he's apparently the fashion ployee.
Exactly put him before. Before we let me go, we got to ask about China. Boy, I think about Nike is one of those names, that's boy. It's a supplier, it's a you know, they make stuff there. Plus they sell about fifteen send the revenues to China. What are they saying about China?
China is a little weaker right now. We've heard from our analysts in China that the economy is not as robust as we would have expected, you know, coming out of the pandemic and also coming out of just their zero tolerance policy for COVID. It is one of the biggest growth areas for not just Nike, but really for a lot of US retailers. So we do need to
see some acceleration in China. That said, I do think that you know, China is doing better for them today than it was during the pandemic, So there is some sign of hope, but we do need to see them stepping up the pedal on China. There is a lot of competition coming into China from other US brands, so it's once again an area where they don't own the space. They don't own the region in terms of sports where they are competing with other players as well.
Should I be insulted? You guys didn't ask me about my shoes? Well, we know way too much about your shoes. You know, you're scratching the service, John Tecker, I hate putt him. Thanks a lot, We really appreciate it. Put them boil your US e commerce and retail analysts at Bloomberg Intelligence.
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We've been talking a lot this week about commercial real estate. We had that great piece out from Bloomberg finally about talking about how some of that real estate loans were starting to rerate and understand what the discount was really going to be. So we wanted to get the view from someone in a C suite at a very big bank. It's Huntington Bank Shares. It has a market cap of forty plus billion dollars. I think, if I just look there,
you go eighteen my bad, eighteen billion dollars. But it's an one hundred and eighty nine billion dollars in assets. Is headquartered in Columbus, Ohio. It serves consumers, small and middle market businesses, corporations, municipalities, and lots of organizations with many different things banking, payment, wealth management, management, and services. So they kind of do it all and they're kind of in the sweet spot of where their assets are
one hundred and eighty nine billion dollars worth. So let's get now to the CEO and chairman, Steve Steinauer. He joins us. Now, Hey, Steve, it's great to chat with you. Thanks for joining us.
Thank you, Alex, and I hope your forecast to forty billion dollars is absolutely right.
I doubled your market cap, so you're welcome. This is what we do here. So, Steve, we've heard a lot about the commercial real estate risks. Michael Barr was just talking about that from the FED Supervision, talking about they're really looking very closely at these loans. What is your exposure? How do you manage it as a CEO, Well.
We manage it with limits, and we've had this discipline for fifteen years. So our exposure is always constrained by how much we are willing to do in any given category, including commercial real estate. So for us, we've got less than ten percent of our loan portfolio in commercial real estate. That compares to about fifteen percent for our average peers, and then we've tried to be very very conservative with it. Our reserves against for loan losses against that portfolio is
a little over four percent four point two percent. Our peers are at two percent. From what we see, we think we're in great shape at this point, going and going forward.
Steve described the kind of the character of your commercial real estate portfolio. I'm assuming you don't have a lot of exposure here to midtown Manhattan. Who's your customers? What's a typical loan look like for you?
Our customers are usually going to be somebody who's been at this business for decades and maybe intergenerationally, so a multi generation family, a long long standing fund. And we're very selective about who we do business with. That's part of why we think we'll come through this in great shape.
You know, if customers who are with us in two thousand and eight and nine and performed well during that period of time, then you know, those are relationships we've looked to build over the last fourteen or so and have been again very disciplined on what we're looking for. So in addition to that, there's global cash flow loan, the value guarantee support, things, guarantory.
Support, things like that, and Steve, as other banks are coming to terms with their losses, would you be buying some of those loans from peers.
No, we're not a.
Bank that buys paper from other banks or or or other sources. We're a customer oriented institution. So if now, if one of our customers had a loan at another bank and that bank was unwilling to go forward with them for any reason or ask them to refinance that, we would expect they'd come to us and we'd certainly look at that. And if possible, we'd bank that loan. We will support our customers.
Where what are your customers telling you these days? Are they are they taking down capital? Are they sitting tight? What are you seeing from both your retail and your corporate customers?
Well?
Now, moving outside of commercial real estate, generally, our commercial customers had an okay to good year in twenty three. Generally there are some exceptions, and this year is starting to shape up better with more certainty and more confidence. Some of that is induced by the FED effectively capping rates are what looks like to be capping rates and reducing rates, so that's a better environment versus an uncertain
level of increasing interest rates. And additionally, there's been so much benefit out of the various stimulus packages that have come through the data, the last in the fourth quarter and already this year, that there's just more optimism that's generally in place. The consumer is doing well on the whole.
So is this an economy then that you think needs rate cuts or is this an economy that needs normalization? What's your lens telling you?
I think the forward mark get reset that just occurred this week, going from six cuts to three or four is now in line with what we think might happen. I don't believe the FED has to cut rates. I think just the fact that the outlook is not for increasing rates provides a level of certainty and confidence. I do believe as inflation continues to adjust downward that there will be rate cuts later in the year. Whether it's two, three,
or four anybody's guests. But I think the market's now much more calibrated tightly to what's a higher probability outcome.
Hey, Steve, When we had some of the weakness in some of the regional banks early last year and then this year at New York Community Bank, what I think that brought to light for a lot of people is, boy, there are a lot of regional banks around the United States. You know, some four thousand of them, and I guess that just banks. The question, you know, is that too many? So as you think about the regional banking space, do you think it's ripe for consolidation? Do you think it
needs consolidation? And if so, how do you guys view that At Hunting Bank.
Well, typically when we hear the term regional banks, it's usually banks one hundred billion up to the g SIPHY levels, and then there's the mid size, and then they're the community banks. The four thousand banks you reference would be a one thousand several thousand community banks, you know, three thousand plus community banks. And by that they find by that, I mean they do they service a defined geographic area,
typically not multi state. Then you have sort of the mid size that could be multi state, and then one hundred billion or more you're going to be in multiple states. And so you know, NYCB unfortunately has a real estate concentration of very high con concentration. I think it's about fifty six fifty eight percent of their total loan portfolio in commercial real estate. It's one of the higher levels,
highest levels in the country. And you know there's a there's a softness in New York and they're concentrated in New York, so very unique characteristics. I think what we saw from CBRE yesterday saying they believe office valuations have generally bottomed out, it's a very encouraging sign.
But to that point, another part of what happened to your community bank was that they got into a different regulatory pier, a tier, and they had to put more money away because of the assets they've bought from signature. What do you think, like, has it happened to you? Does that sort of change how you view growth in the company.
Not at all.
We're very much front footed. We grew loans last year and deposits core deposits, and we expect to do that this year. We're investing in the businesses. We see this as a moment where this uncertainty actually can be an advantage. We've got very strong liquidity, core deposits, capital earnings, our credit's bent outstanding, and so we're investing. We're expanding. We've opened up in the Carolinas in the last quarter. We've
added especially banking business lines. There are a series of other actions that we've taken that will create more and a revenue for us. So we're in a growth dynamic.
Stephen Contra in terms of that growth plan, do acquisitions figure into that?
Is?
Are you guys interested in maybe growing via acquisitions Now?
We're very focused on growing the core and we think we have a lot of opportunities. We combined with a bank called TCF just coming up on three years. We see a lot of opportunity still in that combination. And then those investments I mentioned a moment ago they're all just starting. And so in addition to the core growth we historically have had and we'll continue to have, we have these new revenue streams that we've already invested in.
And before I let you go, can you rate the health of the consumer for US ten being amazingly awesome, zero being no one spending as all COVID.
I'd say we're somewhere around a seven plus percent. And now you know, there's the inflation has impacted a lower income here of our society unfortunately, but there's still a lot of spending. And this January number I think will prove to be a blip on the screen after a fairly after a fairly strong fourth quarter.
Steve, so great to see you. Really appreciate thanks for taking the time. It's a super valuable conversation to get a reader from you. Steve Seinauer, Chairman, president and CEO of Huntington Bank. Okay, seven plus yea, seven plus? All right?
I mean, and you think about it. I mean that the markets, you know, they're based in Columbus, Ohio, of the great state of Ohios. Matt Miller always makes us say, and that part of the country, you know, we've heard from others. You know, there's some innovation going on, there's some decent economic growth there, and so if you're a bank that serves that part of the world with some good franchises, it sounds like it's a pretty good business.
And I was just you know, they have less than ten percent of their portfolio in coercial real estate, so that sounds pretty good relative to peers.
Right, and just highlights what we've been talking about sort of all week that like, yes, certain loans will blow up and be bad. Ye, it's just identifying them and then the timing of when that becomes. But overall it's a much different situation. Anyway, that was a fun conversation. Enjoyed that.
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One of my favorite indicators NFIB but also you Mish University of Michigan sentiment for February. The preliminary read came in a little and I mean a little lighter than estimated seventy nine point six. Current conditions eighty one point five a little lighter but still okay. Expectations coming in seventy eight point four, that's better. And one year inflation expectations take up to three percent. Five to ten year
inflation expectations take up to two point nine percent. This all means something because FED Chair J. Powell has quoted the expectation from you Mish in terms of inflation as sometimes a real pivotal read for them in terms of what inflation is actually doing. And that's why we go to Joanne Too, University of Michigan, Surveys of Consumer and director who runs all of this wonderful data for us. Joan, I gotta say, I look at the numbers and I'm like, nah, okay,
kind of like a nothing burger. What's the something burger?
The main point to see is that we just followed two months of tremendous improvements in sentiment. We're about thirty percent higher than we were back in November, and I think there were questions on whether or not this was going to stick, and what we saw today is that indeed we have solidified those games for the last two months, they weren't a fluke whatsoever. Consumers are on an upper trajectory.
There isn't much room for improving after a thirty percent search, So this doesn't come as too much of a surprise, but it does solidify those games.
Yeah, that context certainly helps put the February numbers into context. So Joanne, talk to us. Just remind us kind of what are some of the main drivers of your survey.
So the survey covers various aspects of the economy, both the personal finances as well as the macroeconomy, labor markets as well as unemployment and business conditions, and the index itself focuses on business conditions and personal finances. And what we were seeing both in February as well as last month, is that consumers really are feeling considerably more confident that inflation has truly turned a corner, and they are starting
to internalize strong labor markets. For much of last year, sentiment was quite low in spite of strong labor markets, and now what we're seeing is that consumers are expecting robust growth in their incomes in the year ahead, and they are feeling much more confident about those labor markets as well.
Rut roll, then we got the CPI, then we got the PPI. What are your what are the respondents most sensitive to you when it comes to the inflation outlook? And will the data this week kind of change it for your next read?
I don't expect things to change too much for our next read because consumers not watching the CPIPPI prints. What they are incorporating are their experiences in the world around them. And you know, as an example, the most recent CPI print, it was already reflected in the prices that people faced in our earlier in the month. So you know, we did see in our current, our current measurement of inflation expectations that the year ahead inflation expectations inched up from
two point nine to three point zero. And I think that's consistent with what consumers were noticing. So even though we are seeing in inflation remaining a little bit elevated, consumers are not concerned at this time that it's going to come roaring back.
And at the same time, the long.
Run inflation expectations, which is followed most closely by policymakers, including the FED that has not budged for three months, we've been at two point nine percent for three months in a row. We've been between two point nine and three point one percent for almost three years, so that's been pretty stubborn and hasn't come down and still remains a little bit elevated pre pandemic, but again much lower than we were seeing with current inflation.
Joan, the labor market remains, you know, pretty darn robust and pretty darn resilient here. Most people who want a job have a job, but they're getting some reasonable wage increases, certainly in many cases better than the inflation rate. How does the labor market factor into your survey?
So there was quite a bit of variation over the last year about who was seeing the large wage gains, whose wage gains were keeping up with inflation or exceeding inflation, and who's were not. And I think it's taken several months of sustained strength and labor markets for that to really pass through to people's pocketbooks and through to their
expectations for the future. And so there is a growing share of consumers who expect their income games to outstrip inflation or at least keep up with inflation and in the year ahead, and that's certainly going to provide additional support for consumer spending. As we're on this upswinging sentiment, how.
Closely are we worried about gasoline prices? Like, I appreciate the idea that the PPI and CPI, well, yeah, that that reflected significantly. Yes, that's what I said. But so the CPI was reflecting prices that they already felt like in the store. But gasoline prices have really moved up, and I'm just wondering what you sense the sensitivity is there.
Consumers are perfectly aware that gas prices are very volatile, and they're actually quite unique in that they're really the only prices that will go down as well as up. And it is true that consumers are going to see have seen the increase in prices at the pump recently, but concerns over gas prices are much lower than they
have been in the past. Those for whom gas prices really bite, they definitely they are mentioning it on the survey, and they have lower levels of sentiment than than for others. But the share of people for whom those gas prices are biting is shrinking over time, and so this could affect sentiment going going forward. But I do not expect a large impact.
What's the biggest I guess concern of yours as you look through your survey data or the concern of your the folks who do take the survey.
I think the big thing to watch in the year ahead is is the influence of the election. We ask many questions on the survey about what people consumers expect in the year ahead and as well as the long term five to ten years ahead, and a growing share consumers are telling us well, it really depends on what's going to happen with the election. And of course we're
very early in election season. There's a tremendous amount of uncertainty, and so as that uncertainty starts to unwind, the picture could look very different depending on how people think the projected results of the election will end up for the economy.
Well, but interesting point because normally doanne do you do Democrat versus Republican on how they feel like? Is that sentiment gap still really there?
Yes, it's been there. It's been there for the last eight years, and that's when we started. That's when we really started to measure political party affiliation on a monthly basis. But we used to do it a few times per administration. And we've always seen that consumers who belong to the political party that's in the White House tend to have higher level of the sentiment than people whose party is not in the White House. So that's no different right now.
But what's really interesting is that even though you know, Republicans have much lower levels of sentiment than Democrats and Independence are right in the middle, all three political groups saw tremendous gains and sentiment over the last three months. So the fact that sentiment has made this thirty percent search since November, that's not attributable to just one party or the other. That's really nationwide.
Really interesting. Heyuan, thanks a lot. We always love the incident analysis. Love this at a point. Thank you. We will see you at the next read Joe in Shoe joining US University of Michigan Surveys of Consumer Director.
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Thirty one of those economic data points today were housing starts came in minus fourteen point eight percent month. The month of consensus was for flat, so coming in kind of higher than expected here. So maybe you know the fact that we're not getting mortgage rates coming down as fast as maybe some people like, maybe that's having an impact on the market. Let's check in with Drew Reading. He's with Bloomberg Intelligence. He covers all the home building
stocks here. Hey, Drew, talk to us about kind of your reaction to this housing start number and kind of what's happening out there in your world of building and building house.
Sure, so, as you mentioned, it was a pretty big headline miss, down fourteen point eight percent from last month. A couple things to point out in this release. First, there's a pretty pretty big revision to the December numbers, so that's part of it. The second thing you have to consider is that multifamily drove the biggest part of this decline. So single family housing starts we're only down about four and a half percent. Multi family was down
somewhere around thirty six percent. And then at the same time, you know, we do have this ongoing rate volatility, so it does likely reflect some caution by the builders, but you know, when we look at this release monthly, the data point that we tend to focus more on is the building permit number. They tend to be more consistent, you know. And in that regard, we actually saw a two percent increase from last month and there are more than forty percent from last year. So the trajectory for
single family housing is still positive. And this is kind of the same dynamic that we expect to play out through twenty twenty four. Is more strength in the single family versus the multi family side.
I thought that permits were down by one and a half percent. Am I What am I missing?
So we're looking at the single family piece.
Oh, I see, and then that was better. So what do permits and starts to respond most too?
Like?
Is it time of year, is it weather, is it rates? What's the trigger for these guys?
Yeah, So we tend to prefer permits because generally, if a builder is going to pull a permit, they have the intention to break around on a house. When you're talking about starts, there's always a lot more volatility in these numbers. You know, you could have on any given month, maybe your access to labor wasn't good, maybe it's weather, you know some of the trades, so it tends to be a lot longer, which is why we prefer to look at permits.
So, Drue, I mean, is it still a bullish call for home building stocks here, because I guess the narrative is nobody's selling their existing homes, so if people want to buy it, you get a home, they got to go get a new one. Is that still kind of the long term narrative here?
Yeah, I think that theme is still in place for twenty twenty four. Like you mentioned, resale supply still very low. Builders are actually increasing their start So when we look out the next year, we think that the broader new construction market is up in the mid single digit range, but we think that the larger publicly traded home builders
could be a ten percent. Part of the reason is because they have the access to land, they have the access to labor, they're well capitalized, and you can transt that with their smaller private peers who typically rely on regional bank financing to grow their business. So with the cost of their capital increasing and the availability of that capital increasing, it's harder for them to grow. So that's why we think the advantage continues to rest with the large builders.
So are those the builders that we're also offering like discounts or sort of adding in some extra juice for first time home buyers or home buyers and their property so they could get them to sell. Are those are those buyers? And do they stop that stuff?
Yeah, So a majority of the home builders are still offering incentives. Most buyers will take a financing incentives and you typically think of a rate buydown, and that's the builders have had great success in pulling that lever to get the get buyers through the door. And it's made the monthly payments on a new home increasingly comparable to what you would find in these existing home market, which
isn't something that you've seen historically. Now, one of the themes that investors are looking out into twenty twenty four is if rates pull back this year, can builders kind of take their foot off the gas pedal from an incentive perspective, you know, And it was starting to happen, but we've had a we've had a hot CPI print, we had a hot PPI print today and now we're seeing the tenure up about one hundred and fifty basis points.
So some of the progress that we've made in mortgage rates has kind of unwound and we're back up above seven percent now. So that's something that we're going to be watching. I mean, the trade on the builders has really focused around what's happening with rates, and at least in the new time, that's going to continue to be the story pushing your refinancing.
Out my refinancing exactly. So drew along that front on the mortgage fronts. You talk to people in the industry, you know, real estate agents, is there a rate out there that they think will kind of get people start moving on this existing inventory of real estate, Like if rates get below six or get you know, closer to five, I mean, is there a clearing rate?
You think, yeah, good question. Then you know what we've found and what we've heard from the people we've talked to is it seems like five and a half percent. It's kind of that magic number. So we're at about right now this morning, about seven percent with the ten year rids. We're probably going to be above that in
the in the coming days. So the cost of builders having to buy down that rate to get to that five and a half six percent rate, it's going to cost a little bit more, but we do think that if they can get there, it can it'll continue to stoke some demand.
I was talking to a first home buyer's kind of like buy a first house, just got married, blah blah blah, and and the real estate agent was being like, it's okay by it now and then just refinance, Like no, you're going to refinance it. And it was like, but guys, like, we don't know when that's going to look like. And then I mean it was like really trying to bully this guy.
I got bullied that way? You did, Yes, totally, But I like the Jerry sure State comes on the market, you got to pounce.
Yeah, you know, Paul got bullied. I don't know forget. I think he willingly knew that. But when you were a first home HomeBuyer, that's a totally different thing. Hey, Drew, what's priced into these stocks? We're getting toll I think Till Brothers next week? What are you looking for?
Yeah, So basically, what we want to hear is that the man trends to begin the year have improved when rates are eight percent. So so let me step back the broader team that we've heard through earning so far is relative weakness towards the end of the fourth quarter, with modest improvements in January and into February. So that's what we want to hear from Toll Brothers is that the improvement in demand as rates have come off from eight percent, we want to see that that persisted into February.
And another thing drew are the home builders are they meeting what most people tell you is the biggest need out there, which is entry level homes or were they just building the high margin McMansions stuff.
Yeah, so there has been a decided shift in the industry over the last couple of years to get down to lower price points where a lot of the demand is a lot of the demographic demand going forward will be and builders have had extreme success. I mean some of the names that stand out are deor Horton Lennar is very focused on price. They're willing to meet the market. A Meritage Homes who has completely shifted their business from one that was heavy in the move upside of things
and now builds almost exclusively at the entry level. So there has been an ongoing shift over the last couple of years. We think that's going to continue, not only because you know, that's where the demand is. But it's another way to kind of help solve that affordability puzzle that buyers are facing right now.
Actually, when how many people have mortgages under three or under four, they're just never going to move Like me, Okay, you any mortgage tucker that doesn't count you paid it off. I didn't because it's yeah whatever, I got two point seventy five beat that.
It's well well over fifty percent of the market.
Yeah, So like that inventory is not coming back, like that hurdle is going to be super high.
Yeah, And that's one of the reasons why we've seen resell inventories be so low. And I do think you know, as you start to get I do think that buyers and sellers perceptions have changed. I mean there's an adjustment period. It's not just that you know, people are never going to move again. There's certain reasons why you have to move. But I think if freights start to get below six percent, in that six percent range, I do think it'll start
to unlock some of those sellers. And what also have to remember is we're that that mortgage rate lock and effect that we've talked about is gradually starting to loosen because you've had a lot of people are over the last year and a half to two years transact at higher rates, so as rates have fallen below peak levels, that does loosen things up a little bit by itself.
All right, great stuff, Drew, Thanks so much for joining us, Drew reading he's a homebuilder analyst for Bloomberg Intelligence. Joining us via zoom from the HQ of Bloomberg Intelligence down to Princeton, New Jersey.
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