Walker & Dunlop, Inc. (WD) Earnings Call Transcript & Summary

So you talked about where interest rates are and you talked right there about the home being the #1 asset in most families' financial picture. And as you and I have discussed in the past, many of those homeowners locked in historically low mortgage rates back in 2020 and 2021 that set them up to continue to accumulate equity in the home because they've got such a low mortgage rate. There seems to be, I mean, you mentioned a 4.80% 10-year treasury, which is having a real impact on both the single family as well as the commercial and multifamily industries right now. But if inflation is here sort of to stay, Ivy, if we're -- Kevin Warsh just came -- was in Wyoming last week in Jackson Hole, and it's pretty clear that he was like, we got to get this thing under control. And so if he's going to raise here, we're dealing with inflationary pressures for quite some time. Are people missing the value of real estate as it relates to an inflation hedge as they look at nominal returns on real estate rather than looking at it from an inflation-adjusted basis?

I think your entry-level buyer doesn't look at it inflation adjusted. I think when we get into where the market is the strongest, $10 million and higher is hot right now. And if you go into Southern California markets, brokers that are selling luxury homes above $10 million can't sell enough. It's very, very strong. And most of the country, I'd say that you're seeing that strength. Whereas you go down below $10 million, it gets more challenging, depending on where you are. But the most challenge is that entry-level buyer who probably is not sophisticated enough to appreciate the inflation hedge where that luxury buyer is. And I think that today, you're right, inflation is obviously a concern going forward. And I think one of the things that we talked to a bunch of brokers who are hosting our housing summit in a few weeks in Boston and prepping for the conference talking to some brokers yesterday, what I'm hearing, it's not so much that they can't afford it. They're looking at the rate today with a lot of uncertainty. And maybe they -- they called it marry the house, date the rate, date the rate, marry the house. That was a good idea because even though it's a little stretched for me, but in 2 years, I'll refi. And therefore, there was the behavioral -- it was okay to buy because I can refi. Now they're not clear on what rates are going to do 2 years from now. So the buyer behavior, at least within the resell market is uncertainty has really put a lid on overall demand. And we've seen a cooling throughout the summer as we've seen more of the risk that inflation is still not only a problem but is reaccelerating. But when we look at the stuck factor and you look at where we were in 2022 and December '22, 88% of homeowners that had a mortgage were locked in below 5% and 50% were locked in below 3.5%. Fast forward to today, in May of '26, we're now at 68% below 5% and 39% below 3.5%, and by the end of '27, we'll be at 59% below 5% and 33% below 3.5%. And I'd give you those numbers because I do think the stuck factor diminishes people's willingness to give up that low rate. But as it gets better, slowly, we call it this grind, life changes. And the three Ds that brokers like to talk about are the three Ds of real estate, death, divorce, default. Those are the three D that will drive a transaction no matter what the economy is doing. And then if you add the fourth D, which is discretionary buying, I think the fact that they're stuck mitigates discretionary selling, where I want a new house. No, I'm not going to give up this low rate. But if I'm getting a divorce, you're going to get a new house, you're going to go buy another house because you're not going to live together. Some people actually still live together because affordability is so constrained anecdotally. But I think those are some of the dynamics that are in the market today. And I definitely think that the retail market earlier in the spring, we saw green shoots as we approach the 6% mortgage rate, and we did see incremental demand because people always say to me, what's the magic rate that's going to make the market healthier, and what we see, it's more about rate of change. And as rates were headed lower, people were getting more comfortable with the idea, okay, maybe it's not the lowest rate in the world, but I'm really missing the opportunity to buy a new home or buy a resale and fix it up. I think we did incrementally start to see improvement. That is now sequentially and unfortunately, decelerated.

Do you think that Bessent's move to buy at the long end of the curve and sell at the short end of the curve is going to have a material impact on rates in the market and potentially get the long end of the curve down?

Not smart enough to know the answer, but I think it's...

Come on. I'm not going to let you say that. Come on.

My personal opinion is the fact that Scott Bessent has to notify the markets that they are going to buy at the long end of the curve when there's a $40 trillion deficit didn't make me feel warm and fuzzy. And we saw that rates just bounce back higher after the initial announcement. So I don't think you can control the long, and they don't have enough funding to do that. I know that Fannie and Freddie buying MBS helps, that's keeping the spreads down. And I think that they can control mortgage rates more they can control the tenure. But I don't think that they can really control the long end as it relates to the amount of bonds that they're buying. It signals to the rest of the market, we'll sell it to that. Go ahead, buy as much as you want, but we want out. And I think that unfortunately had been the case that foreign sellers had been putting pressure on the bond market. But most of the buying and selling is now -- is less foreign and more domestic.

But on that, then so -- I mean, you underscored it, $40 trillion of U.S. debt today. We've got -- the current administration is projected to add $2 trillion -- sorry, $10 trillion to the national debt in the 4 years that the Trump administration is in place. $10 trillion, $2.5 trillion a year. And the alternative is the Democrats who haven't found a spending bill, they dislike either. And so I guess the question here is it feels like the bond market is trying to give us a wake-up call saying that this profligate spending is unsustainable, and yet the alternative used to be, okay, well, the Republicans are for lower taxes and lower spending. And now we have the Republicans of lower taxes and more spending, and we have the Democrats of higher taxes and more spending. It feels like no solution is going to actually address the core problem, which is $40 trillion of outstanding debt is concerning the bond market as it relates to the U.S. being able to actually pay those interest payments in the future and therefore, going to need a higher coupon rate to accept that risk. And therefore, that drives into the housing market, both single-family as well as multifamily on the financing cost, which has always been a core component of it. And therefore, I mean where's the relief, I guess, what's the off-ramp here?

Right. Well, you just saw the announcement that Social Security will run out by 2032. And maybe that's putting some pressure on Congress to contemplate doing something about it. That was like a recent article maybe last week, and really what they should do is lower -- to raise the retirement age and figure out how to generate incremental funds that we need desperately. And until they do something that creates austerity, no one trusts this government. And so there's a lack of confidence in their ability to control spending either side of the aisle. And I think that what they need to contemplate is raising the retirement age. We're living longer, we're working longer. We're both at of age we'll probably work for the next 10 years, you and I, or longer and yet people are getting retirement, Social Security at 65 or even earlier if they want to accelerate it. So I think that's -- at least that's my thought. But I don't think that this -- legislators that we currently have, want a risk getting fired by the constituents because the people that vote the most are the oldest, the elderly boat. They're the largest voters in the country. So I don't know how else to solve for the challenges that we have, but do we get this administration to focus on spending reduction. I don't see that in the cards right now, not what this war going on.

So if we're in balance from a housing standpoint, and housing is an important issue for whichever administration, I don't -- whether it's the Trump administration now or whatever the next administration is going to be. Housing has always been a core tenant of more people should own a home, single-family homes are the place where people have a store of value. As you said previously, it's typically the largest component of wealth for families and for retirees. And so if you were to look at the policies that are being put into place now, and we obviously just got the ROAD to Housing Act passed by Congress unsigned by the President, but put into law. Where would you direct U.S. policy as it relates to being supportive? Maybe not stimulative, maybe you're saying we don't need more stimulus, but supportive of the U.S. housing market?

Well, let's just take a step back for a moment because one thing we didn't talk about with respect to shortage or balanced or oversupplied is the vacancy rate in the country. So we can come back to that. I just want to make sure we highlight that, that's a very...

Let's just jump on that. Coco, pull up the slide that shows the vacancy rate on multifamily versus single-family rental because this will guide some of Ivy's comments. So to those of you who are just listening not seeing, this is a slide that shows single-family and multifamily vacancy rates in America. And today, multifamily is at 8.3% per Zelman and single-family rental is at 6.2%. Anything else you want to point out on this slide, Ivy, before you go into your comments? .

No, I think it's important to recognize that, obviously, vacancy levels fluctuate, but national vacancy rates are not reflective of what's happening per the differentiated pieces of shelter. So multifamily right now is oversupplied. We're seeing completions come down, starts have come down. So we do expect that supply will get absorbed and get back into balance. Same thing with SFR, we had a lot more build for rent. And now that the housing act has been signed or didn't get signed but got put into law, we are seeing BFR come back a little bit. So I think generally, we'll get there. The areas that are undersupplied within the ecosystem is really on the seasonal side. Second homes were bought up during COVID, and there's a lack of second home availability, and I think that could be a bright spot for builders, developers to contemplate. But I think the reason I really want to highlight that is if you make an assumption that we're at a 10% vacancy rate, then you could say, "Oh, well, their vacancy rate is going to be coming down and therefore, we're going to have improvement." It really matters what number you're using. And that's the variable that I think there's different opinions and different various firms. Like for example, CoStar is at the same level we are at 8%. Others are using multifamily is at 10%. So it matters what you're assuming and therefore, to forecast whether we're imbalanced or over supply makes a big difference.

You mentioned CoStar. I just -- random thought on this, but I saw it yesterday in a Bisnow article, focusing in on President Trump's 1,680 stock trades in 2026, one of the stocks that he sold they pointed out was CoStar. I just thought it was so funny that like they're sitting there peering into that and trying to see what the President is trading on. I won't withhold judgment on that. So if we're looking at that type of vacancy on the multifamily side, it feels like we've gone from sort of an index market in the sense that you could buy multifamily in 2012 to 2022, pretty much. And there was a really great macro backdrop to not enough supply, rates being low, a renter nation, if you will, more than a buyer nation, and you could kind of bet the index, and it did really, really well. It feels like we're now back into kind of a stock pickers market, if you will, as it relates to multifamily and most particularly, which markets are showing strength in green shoots in which markets are still lagging. One of the big things that you have pointed out over the past couple of years, Ivy, was the strength in the urban gateway markets just because there was a lack of supply when the Sun Belt got overbuilt. And so the Sun Belt has been lagging while the urban gateways have actually held up pretty well. And we're now sort of at that inflection point, if you will, where some of the excess supply in the Sun Belt markets has been absorbed. And yet you still sort of have the same demographic and job trends in the urban gateway cities that you had ahead of time. So if you're going to be a stock picker if you will, but instead of stocks, you're going to look at either regions or cities, where is your view right now from a multi standpoint as it relates to where people ought to be making bets?

Multifamily. Well, I think that you're right, the lack of supply in areas like San Francisco is definitely the perfect example when you don't have starts there for more than 5 years. We now have rents up double digits there. And so I don't see that changing. I think where we have a deficit of starts you're going to continue to see rents reaccelerate. The Sun Belt has lagged. We just published recently our survey for July for multifamily operators as well as in the June survey, we saw that things were decelerating. We had green shoots that were coming apparent in May, and June to some extent, on occupancy. But then in July, occupancy and rents decelerated more than seasonal, when those are the two strongest months of the year, supposedly. So a lot of that is still from the Sun Belt. Because if you go into the Midwest where there's a lack of supply, you're still seeing very healthy rent growth. So I would still bet on the markets that are not seeing starts reaccelerate as a way to profit from stronger fundamentals. Not to say it's great out there everywhere, but there are markets that are seeing not only inventories coming down for single-family availability, i.e., Miami. I take Miami has been where we've seen green shoots for sale. But overall, lack of availability, Miami inventory this year is down 17%. So what is available there in terms of multi will benefit from the lack of supply that is now becoming apparent in the for-sale market. So I would bet on Miami, if I was a developer that will start to thrive as the inventory gets cleared because of the lack of that for-sale availability. And that would be the same in markets like San Francisco, I mentioned, Tampa is showing green shoots as it relates to improvement with inventories coming down double digit. So multifamily operators might benefit there as well. Keep in mind, multifamily is the better right now asset class fundamentally from the perspective that we are seeing incremental accelerating renter households while owner households are decelerating because the affordability is clearly much more compelling to be a renter than an owner. If you're comparing an apartment, maybe not the best apples-to-apples to a single-family starter home, it's about $900 all-in differential between monthly payment. Property taxes and HOA and mortgage insurance are factored in, and overall insurance. So I think it's looking more promising from our perspective to be in the multifamily sector, if I'm making bets than in the for-sale market right now, especially in the new home market, even as inventories -- spec inventories are down double digit from where they were last year, but there's a lot of more challenges in for sale and in the new home market than in multifamily, we think.

And you went to Miami there and Tampa and San Francisco, what about the darlings of the sort of 2019 through 2022 era of the Austin, Texas, the Nashville, Tennessee or the Charlotte, North Carolina? Those were the boom markets. They got oversupplied. Austin last year had the -- we call it rent growth because we're all so used to seeing rent growth, but it was the biggest rent decline year-on-year of 7.7% in Austin. When does Austin go from catching a falling knife to actually hitting bottom and starting to build back out?

Based on the supply that we see there, the level of, call it, lease-up necessary and what's still coming. I have a quartile the markets into we'll see maybe 3 to 5 years of continued supply -- oversupply that will need to be absorbed at a decelerating rate but still oversupplied. So it might be a few more years before we really see Austin reaccelerate because of the significant overbuilding that happened there. That's the same in a lot of the other cities, whereas in the Carolinas specifically, I think they're better positioned because South Carolina was the #1 state for population growth through the most recent data. So you're still seeing better migration and overall growth in those markets than in Austin.

And what about -- as you talk about a market like South Carolina, it makes me think about Boise, Idaho, and it makes me think about the growth that we've seen in Boise. Boise being one of the biggest boom markets. It's actually your most recent homebuilder survey has the sentiment on the Boise market as being the #1 market in the country from a homebuilder standpoint. A lot of that, all of that is due to Micron and Micron's tremendous run as it relates to being one of the major chip manufacturers in the world. Its stock price is going through the roof. I actually heard somebody the other day, Ivy, go from the Mag 7 to something like the -- I can remember what they called the 9, but they included Micron in that 9. So they added them in is like the big stocks that are driving the stock market today. But as you think about that as it relates to AI, where data centers are being built where the knowledge economy, if you will, is growing such as San Francisco, which you mentioned previously, is one of the fastest-growing economies in the country. Boise is up there. Scottsdale, Arizona is getting the Taiwan semiconductor plant that's being built there. How important is job growth to this overall housing mosaic, and if it is based on that, obviously, you and I both know that growth markets are distinct from good real estate markets. I mean you can have a high-growth market with unlimited supply, and it doesn't turn into a really good real estate market. You can also have modest growth with no new supply, and it actually is a pretty good real estate market. So as you sit there and look at your kind of heat map of where from either single-family or multifamily, you'd put bets, are you going after that job growth? Or are you looking at a supply-demand that says, "I'm going to be a real estate owner for the next 10, 20 years " It's much more to do with the supply-demand curve than it is with the job growth curve.

There's not a single variable that we would look at. We're going to look at -- actually, for our housing summit, we'll be talking about relative market scorecard, like where the best markets are, but a lot goes into that, but employment would be at the top of the list because builders have always used something called an EP ratio, which is the incremental change in jobs divided by the incremental change in permits to kind of gauge where the market is. So a really high EP ratio would indicate that you're going to need more supply because you have very strong job growth. On market, you didn't mention Columbus, Ohio has been a darling because they're building a chip plant, and there has been a lot more inbound. But it's not because necessarily we're seeing jobs there, but we're seeing developers recognize there'll be jobs there. So they're coming there where they hadn't been there previously to try to get in front of that and add more supply. And that, I think, is the right strategy for a market that's seeing job growth. But that's not the only variable. We want to look at other factors like what is the inventory picture look like right now, overall inventory, for sale inventory, was multifamily in terms of the availability of supply as well as other factors, household growth, what's happening with new employers or job growth. But there's a lot that goes into that, the demographics also. So we have a secret sauce that will determine the ranking of the markets, and we'll publish a report after the summit about it.

Sticking on the sort of stock picker theme and to your point about there are a lot of inputs to it. It's not just job growth, it's supply-demand characteristics, et cetera. But many people in the multifamily industry are like survived at '25 and then '25 came in, and we saw no rent growth. And everyone has sort of jumped over '26 to sort of -- and I use this term when we were together in Sun Valley, a slice of heaven, in '27. But when do we start to see rent growth? And is the answer to that you're not going to see national rent growth anytime soon, but you might see it in specific markets, and therefore, pick up the Zelman research report, and we'll dive in and tell you that Nashville is going to start to grow then and San Francisco is already growing at sort of unbelievable rates, but you're not going to see national rent growth across the board, and it's not going to be a sort of monolithic market. Which is it? And if you can, I know people listening to this would love to know what markets you think have the components for rent growth to hit sooner rather than later?

Well, we are forecasting rent growth to increase in '26 to roughly for multifamily, 1.5% nationally, and then we have that increasing to 2.6%. There's a little bit of a downward...

In '27?

'27, correct. That doesn't get back to trend line, though, until '28, we get to 3.7%. So obviously, there is subject to downward pressures if rates remain as elevated, and we're not seeing any abatement in inflation, but that's our current forecast. And therefore, we are seeing the fortunate benefit of reacceleration with the exception of the July data I just mentioned that saw slowing in blended rent growth. So we're optimistic that lease-up competition is improving. One of our survey questions to our owners and operators are the level of lease-up competition has been coming down and the use of incentives has been plateauing in terms of concessions. So as we start to read the tea leaves, we do see markets will start to show improvement. More likely, it's delayed in '26 into '27 to see any real acceleration. But I think it's slowly getting better and be happy to share the relative performance when we finish the analysis.

One of the things that you and Chris Mikkelsen and I have discussed is just that many people who are buying right now in the multifamily space are buying on, if you will, negative fundamentals and at the moment that you start to project out rent growth in the pro forma that it is going to change the calculus immediately and that all of a sudden, you're going to get all these properties that have been sort of sitting out there waiting for an actual bid on them to actually get real bids, and we're going to start moving in the right direction in a pretty dramatic fashion. So hearing you talk about some in '26 and then that starts to actually get well below trend up in 2-plus percent in 2027 is encouraging.

Yes, I agree. And I think we're, again, more optimistic. There's demand, and we have demand supported by renter households accelerating. We have very favorable affordability. The rent-to-income ratios are not really much above trend line. So there's really much stronger fundamentals for multifamily. Underwriters today that are looking at transactions, they're looking at cap rates going the wrong way because of where rates are. So I think we need to see rates kind of stabilize, but I don't disagree that there's a lot of pent-up demand in the transaction market that will be unleashed, whether it's getting improvement at the long end of the curve for a 10-year paper or we have more confidence that rent growth is going to reaccelerate. And it might be just because the for-sale market will remain so much in the doldrums as rates are keeping affordability at very, very stretched levels that people do need shelter. And even if young adults are not moving out as early as they've done, you will have incremental households. And I think multifamily will be the beneficiary of that, so more optimistic for sure there.

So to wrap this conversation up, A Decade Divided, which is the follow-on to your cradle-and-grave analysis, which was exceptional. But in A Decade Divided, you read it, and you are the CEO of a homebuilder, you are the CEO of a multifamily either developer or owner, or you are the CEO of a build-for-rent SFR company. Once you've read it, what would you expect or want to see one of those CEOs do as it relates to their strategy based off of the data that comes out of it? So let's start with homebuilder, then we'll go to multifamily and then we'll go to SFR, BFR.

Well, I actually presented the question to your panel in Sun Valley to Ryan Marshall, asked if A Decade Divided or any of the demographic analysis would make its way into the boardroom and would it possibly change your strategy. And the answer was no. Although I would give Pulte credit because they're the only public builder that's really made -- put a stake in the ground to go after active adult. And now again, this Explore product. So I think directionally, they're taking advantage of the changing demographics. And they're actually doing a very large study that will be supportive, I believe, of their strategy. That is not the case everywhere for our homebuilders, so Pulte might be unique in that respect. But I think that it's such a big amoeba in some respect that's so far away, no one's really worried about it. But when you look at one of the exhibits in the report, we're currently call it, running 1.4 million starts. Now if we start to see the 2030 and beyond that we're going to see household growth go as low as we're forecasting, we're going to have starts come down or we will oversupply the market. And will builders recognize this and pull back on starts, I think that's debatable. And I think when you look at the market share of the public companies for the new home market at 55%, they're driven by shareholders that want them to grow. So I can't imagine that they're going to adhere or think about 5, 10 years out that we should really be buying a lot less land or land banking less land and be more, let's say, nimble given what could be troubling demographics. I don't -- I'd like to say that I think they're going to start thinking about it, but it probably has to hit them in the face to some extent before there's really any major changes. Again, they don't control what others are doing, but it is so concentrated. Unlike multifamily, where if you talk to CEOs that might be more regionally focused, it does matter where you are and where you operate. If you're a national multifamily operator, I think you'd have a similar maybe reaction to what a large public builder that's national might think, okay, this is too far out for me to worry about it. We're talking about 2030 and beyond. But we do likely have a scenario where if renter households, if we're going to have household growth, it could still be more skewed to renters. Absolute numbers for owner households are much higher, but if renter households are going to grow, you could capitalize on that depending on, again, where markets go back more layered down than just the demographics, where are we seeing regional differences as it relates to the underpinnings of the other aspects of the fundamentals. So I think it seems as if there's not a lot of attention to this. I know talking with clients of W&D, some are very focused on it and really more on repairing and remodeling existing multifamily product than starting and developing incremental new product. I think we might see a shift to that for multifamily operators in the transaction market, more value add than we would new construction if they started to appreciate some of the risks that we're highlighting. I think they would be quicker because they have an alternative, Willy. Builders don't have an alternative.

Just on that, you were talking about the aggregate number of homes. I think the numbers that I pulled from one of your research reports is there are about 95 million single-family homes in America and about 40 million multifamily units in America today. And so if you look ahead a decade, Ivy, where do those two numbers go as it relates to -- I mean, right now, we're at a homeownership rate in America of somewhere around 64%. I think I'm right on that, something like 64%, 65%. We got to our peak close to 70% back in the Bush 2, George W. Bush administration in the early 2000s and have been sort of firmly in the mid-60s. Is it -- you've talked about in this hour the fact that right now, because of affordability, it's sort of advantage multi over single-family. But project forward 10 years and say, does that 95 million single-family homes move up well over 100 million because there's just going to be a need for that single-family product? Or does the 40 million multifamily homes move from 40 million to 45 million or 50 million because we become more of a renter nation?

Just thinking about the bookends, births versus deaths and recognizing that more people will be dying than born in this country, when you think about, therefore, again, incremental homes coming to market through estate sales, it would feel like we're going to see a shrinking of homeowners as opposed to acceleration, whether it's going to shrink dramatically or it's going to modestly come down, but you're having less people start buying starter homes. They're starting buying homes at 40 as opposed to in their 20s. And if they're selling because they're -- people have passed, we're going to see probably a lid on growth and maybe more pressure on absolute numbers because of the phenomenon of the demographics. Flip side would be multifamily would be the beneficiary of that, but might also not grow significantly higher than where we are currently because overall households are going to continue to decelerate. But I would put more, I guess, weight on multifamily improving than I would on the single-family ownership. And today, people say, "Housing can't be that bad." Our homeownership rate has been roughly 65%, 64%, and that's pretty much trend line. But I think it's very bifurcated and it's not -- the composition looks very different of who owns and at what age.

Yes. Super interesting. Ivy, thank you. As always, great to spend an hour with you. I get the luxury of having you around all the time, but for those people who listened in today, I hope you enjoyed our conversation. As you can tell, the A Decade Divided research report that Zelman put out is a fantastic report with a lot of data that gives you a very broad view of housing and housing over the next 5 years in the 2020s, and then that then sets up what's going to happen after 2030. So Ivy, thanks so much. I hope you have a great day, and thank you, everyone, for listening in. We'll be back next week with another Walker Webcast.