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.

Hi, Liz Ann. Seems like the markets are finally reacting to all the changes we've been experiencing from the new administration. It seems as if it all just came at once. I think the S&P 500® is down about 2.5% since the last time we spoke. What do you make of all this?

LIZ ANN: Yeah, so it's not just a little bit of weakness showing up at the index level. There's been a real shift in the internals of the market where leadership resides from a sector perspective, relative to last year when the Magnificent Seven and tech and comm services, communication services, I should say, were the darlings. This is a year, at least on a year-to-date basis, where the more defensive areas like healthcare and staples are doing well, and pulling up the rear is actually some of those growthier components of the market. It's also the case, and you know we've talked about on the program before, I think it's important not just to look at index-level changes from highs, drawdowns, but what individual stocks are doing and also highlighting some of the weakness that's shown up in the growthier areas in the tech space or tech-related space is the average member maximum drawdown within the Nasdaq, just year-to-date, and we're not even two months into the year, is a negative 25%. 

So there continues to be a lot of churn under the surface. And I think both a little bit of a pullback at the index level, but a heck of a lot of churn under the surface, is absolutely reflective of the uncertainty we're seeing it, and we're seeing it in some of the widely watched measures like the weakness that we saw in consumer confidence, a move up in concerns about the unemployment rate going up. You've seen it in even in consumer sentiment data. We've talked about that before. There's political biases that are more obvious in the consumer sentiment data, but you're seeing it in capex intentions. I know one of the things that we floated around our internal group when we got some of the regional Fed data was the Dallas Fed, which was a weaker overall reading on the economy in that region. 

One of the things these regional Feds do, well, they will post verbatims from the companies in their districts. And it was an earful or an eyeful, depending on whether you were listening or reading, in terms of the mentions of uncertainty and the potential stalling in activity, and it's, I think, a particular concern because one of the things that we anticipated could happen and touched on it in our outlook was the possibility that we would start to see some convergence between services and manufacturing, with manufacturing, which has been in recession type conditions for about two and a half years, finally starting to show some signs of life at a point maybe when services started to roll over. We've seen that with the S&P version of Purchasing Managers' Index. S&P Global has a version of those. The ISM, Institute for Supply Management, versions are maybe still a little bit more watched, but S&P Global's version is starting to capture more attention. 

And we did see a move back into expansion for manufacturing and actually move into contraction for the services side of the economy. My concern is that we might arrest some of that improvement in manufacturing, given the uncertainty with regard to not just tariffs, but immigration policy. I also think what's been important in the equity market, and I'll toss this now to you because this morphs into your world, is I think the move down in bond yields, the 10-year, I think, intraday yesterday as we tape this, went to slightly below 4.3%. The fact that that seems to be driven by concerns about the growth side of things as opposed to moving down because of enthusiasm about inflation coming down. I think that's part of the reason why the market has struggled a bit. Yields keying off growth more than inflation. When yields go down, less positive for the equity backdrop. So what are your thoughts on the driver of this move down in yields and your outlook for where yields go from here?

KATHY: Yeah, I would agree that this is more of a growth scare kind of move in the Treasury market than it is a happy view of inflation coming. And you look at any of the indicators, inflation expectations are for the majority of people on the way up and majority of companies on the way up. That's likely driven to some extent by tariffs.

So you've got inflation expectations kind of pushing higher, but you have concerns about growth slowing down. Now, you can tell me whether you think of this as just a growth scare or the start of something bigger. I think it's the uncertainty about which it is that is probably weighing on the markets right now. But I think the bond market has been in this push-pull for quite some time. What are we going to worry more about? Are we going to worry about inflation and the effect of tariffs and immigration limits and that pushing up inflation? Are we going to worry about tariffs and immigration limitations pushing down growth? And what is the sequence of events here? Which happens first? And it seems like we're rolling through these scares. First it's inflation; then it's growth. Who knows? Maybe it'll be inflation again, then growth again. At the moment it looks like, although we have a growth scare and some indicators of a slowdown, we're not on the cusp of recession. So I think that the bond market may be getting a little bit ahead of itself here in those terms. But I do think that there is a bigger focus on growth right now and concern about what all these policies mean for growth. And that seems to be what's pulling down Treasury yields. Now, ironically, this is in the midst of all of this debate about deficit spending, etc.

And it doesn't look like Congress is going to come up with a balanced budget anytime soon, in the next decade or so.

LIZ ANN: You don't think?

KATHY: So we'll see if there's any progress in that regard, maybe bringing down the deficit relative to GDP, but early days on that, there's still a lot of debate going on in Washington. So I think we're in a bit of a growth scare right now. But I think Treasury yields around 4.3% on the 10-year, probably near the low end of where they're going to go for now. We need to see those inflation numbers improve or some real evidence that we've got a bigger slowdown, especially in employment, in the employment sector than anything else. So if we get a weak jobs report with rising unemployment and real slowdown in hiring, then yeah, those yields could come down some more. But if we continue in this trend of kind of a gradual slowdown, but nothing more major than that. And I think yields continue to bounce around in this range from here. 

Now, one of the areas of the economy that is very sensitive to interest rates, which is relevant today, I think, is the housing market. And I think you have a guest today that focuses on the housing market. And can you tell us a little bit about her?

LIZ ANN: Sure, I'm excited. So the focus of our episode, or a guest portion of our episode this week, is the housing market. We've got Ivy Zelman. She is a trailblazer, really a legend in the world of housing and housing research. And Ivy is the executive vice president and co-founder of Zelman & Associates. She has more than 30 years' experience guiding investors and corporate executives toward business success. In 2007, Ivy co-founded Zelman & Associates, which is the leading housing research firm nationwide serving institutional and private equity investors, corporate executives from the home building, building products, real estate, mortgage finance, and rental sectors, and more. She is a frequent guest on CNBC, Fox Business, Yahoo Finance. Ivy was actually inducted into the Institutional Investors America Research Team's inaugural Hall of Fame in 2012. And in 2020, Ivy was included in Barron's Top 100 Women in Finance. She is the author of a memoir titled Gimme Shelter: Hard Calls + Soft Skills From a Wall Street Trailblazer. As a Rolling Stones fan myself, I love the title of that. And we will have a link to the book in the show notes. 

So Ivy, thank you so much for joining us. I'm looking forward to the conversation. We really appreciate it.

IVY: Thanks for having me. I am as well.

LIZ ANN: So let me start with the ultimate big picture question. We've been calling it the pandemi-cycle, this very unique broad economic cycle that's been in place since the onset of the pandemic and how that it's manifested itself through the economy and the rolling nature of strength and weaknesses and the separation between manufacturing and services and the hits, but also the benefits, at times in the cycle that have accrued to housing.

So maybe just share your thoughts on this cycle being defined as starting with the pandemic and in the aftermath and what has made this cycle unique from your perch overlooking the real estate market.

IVY: Well, thinking back to the pandemic, know, initially when the country shut down, we would have expected with job losses skyrocketing that the housing market would plummet. And that was, you know, everything's always about jobs and consumer confidence. And when we saw that housing was actually, you know, a pandemic winner, it was reflected in substantial migration from, let's say, north to south, from east to west, and the Sunbelt, predominantly been the biggest beneficiary. So what we saw was probably double the typical migration where we normally have migration headed down south anyway. And that resulted in substantial price appreciation, which in the magnitude of time it took to get 30% annualized price appreciation was pretty unique in itself, even though pre-GFC, or great financial crisis, we had price appreciation, but it was in a longer duration. And so the speed and magnitude made that unique, whether it was work from home that propelled people to either go further out into more of a less dense environment, wanting more space, so we saw our square footages increasing as builders were bringing new product to market. But I think we have quite a hangover as a result of it too. We're sitting at 25-plus-year levels of stretched affordability.

And with mortgage rates, even as they come down slightly, I think that the consumer is a bit tapped out, predominantly entry level more so than the high end. And the high end has really been a big beneficiary of the massive price appreciation we have. So the wealth effect and, I would say, the magnitude of the amount of equity that people now have in their homes has given them more ability to withstand what might be some economic turmoil. And there's a substantial amount of people today that are sitting in great shape. However, if you're buying today, and you're looking at buying a home today, it's really become very unaffordable. And when you think about the inequality gap in this country, it's only gotten much wider because, if you're not a homeowner, and you've had inflationary pressure on your wallet, there's arguably a lot more stress there than what we see at the higher end.

I don't know that that's unique necessarily, but certainly the lower end has been the unfortunate ones in terms of not being able to move forward and have the American dream come to fruition.

LIZ ANN: Yeah, Ivy, talk a little bit about the supply-demand situation over the last five years or so. We know that another unique aspect to this cycle is that when we were in the Fed-tightening campaign and short-term rates were going up, longer-term rates were moving higher too. I think the stated mortgage rate got to close to 8%, but I believe at that same time there was still a three handle on the effective mortgage rate because so many homeowners shift to fixed-rate mortgages, but that also constrained the existing home market in terms of supply, so talk a little bit about just how unbalanced that became and whether we're starting to see some improvement in that supply-demand imbalance.

IVY: Well, thank you for bringing it up because that certainly is probably the most unique aspect of the cycle that I should have said earlier, because when I think about, you know, my 30 years plus of analyzing housing, we've never seen home prices increasing despite the actual level of turnover being at recessionary lows at the same time, the new home market doing very well in the face of what was this disincentive for people to move, the stuck factor in the existing home market.

And you hear a lot of rhetoric about the lack of housing, that we have a housing shortage. And I think the reason I call it rhetoric is because we don't have the right-priced inventory in terms of supply. We certainly have young adults that are living at home longer or living in roommate situations longer, well above trend line, happy to share those numbers. But the reality is that we would have decoupling if we had more affordable supply. So we have a deficit that is substantial, but I don't think we can solve for it, unfortunately. I don't see a easy solution, whether at the federal level, at the local level, it would have to be some type of subsidization. But there's no question there's a severe imbalance.

LIZ ANN: Well, and as a result of that, did I see correctly in a headline that the average age of first-time home buyers has gone up pretty significantly, and that's got to be an affordability issue, right?

IVY: Absolutely. And other thing you mentioned is thinking about, you know, today, whether we're looking at housing turnover again, which is stuck. What has changed slightly is that we're finally seeing inventories rising. So you know, in the COVID period, the velocity of turnover was probably two or three times normal. And even with inventory tight, we weren't seeing the inventory long enough on the market to count it. It would go on the market, and it would quickly come off. But now what we have is inventory up probably 15, 20% nationally.

But within the Sunbelt, predominantly Florida, Texas, Carolina markets, inventories are up, anywhere depending on the metropolitan statistical area50% to as much as 100%. And that is a good thing for the housing market because it allows for the person who feels stuck and doesn't have any choices. You hear many people say "I want to move, but I can't find a home. You know, there's nothing to move into." So that will give, I think, an opportunity for the existing market to probably increase our estimate for '25 is about 5% growth, which isn't saying much because it's still historically well below trend line, but followed by we have 9% growth in '26. So that inventory is a positive in our opinion.

LIZ ANN: In terms of the growth outlook that you have, what is the dispersion at the either state level or, I don't know if you look at it more at the state level or metropolitan area because, you know, what's that old line about real estate being a local phenomenon? And at times I think you can analyze housing somewhat monolithically, but I'm guessing we're at the point where there needs to be a lot of that local analysis too, right?

IVY: Yeah, and it's actually interesting because where inventory is increasing at the fastest rate, we're seeing more activity that's actually positive for the consumer because there's more value being created. And that's really coming from production home builders, predominantly the public builders. The public builders today account for more than 50% of the market. And because they're providing significant supply to the market, they're also offering mortgage-rate buy-downs, which creates value. So it's really almost a buyer's market.

When you think about the new home market, they're getting value, they're feeling good about it, they're locking in in many cases for 30 years at a 4.99% fixed rate, which is expensive for the builders, but that creates value. But where there are production builder activity, which is predominantly Sunbelt, the smile states,[1] that's where inventory is rising the fastest and home prices are starting to really decelerate, even turn negative in some of those markets, which is good thing. I think we need that.

However, when you look at the Midwest and areas where the production builders are less prevalent, you're seeing that home prices are still increasing at a pretty fast rate. And therefore, I don't see any abatement or any value being created. And you know, think about a market, you know, my hometown of Cleveland, where inventories are up very modestly relative to '19. They're way below where they were. And we really look at '19 in comparison. And some of the markets, again, the Sunbelt are well above now where they were in '19. But in Cleveland, home prices in '24 rose 8%, and that's because there wasn't enough inventory. So homes are sitting on the market much shorter than normal and are in some cases, depending on location, location, location, get multiple bids, and that's still happening in parts of the country, but it's really dependent upon what the competitive inventory situation looks like. So that you can draw a line almost on any builder market—that's production builder market where inventories have risen in existing—that's where we'll see probably the price corrections most likely, and we'll continue to see pressure there as the builders work through their supply, and the existing homeowners take advantage of the opportunities to get better value.

LIZ ANN: Now you mentioned that public home builders represent about 50% of the market, and I did the really intense math in my head and made the assumption that the other 50% is private home builders. How has that relationship changed over the years?

IVY: Dramatically, actually. When I started analyzing the industry back in the early '90s, it was less than 10% for the public home builders market share. So it's grown substantially both organically and through M&A,[2] and part of that growth has been a function of a lot of factors, but probably the biggest is the differential in cost of capital and the scale advantages that the larger builders have, and I think it's going to continue. I don't expect abatement. The trajectory might flatten out a little bit, but we expect market share to continue to increase for the publics.

LIZ ANN: So let's go back big picture and talk about what clearly is becoming obvious uncertainty that is pervading confidence measures and forward-looking, whether it's CAPEX plans or some of the survey data that suggests that there's a dampening of desire or expectations of major durable good purchases, including homes, in light of all this government-policy-related uncertainty. So I wanted your perspective on whether it's tariff-related uncertainty, immigration-related uncertainty, and the impact it's having on either the psychology that surrounds the real estate market or any of the data, if you're starting to see meat on the bones of this.

IVY: Well, the spring selling season is off to a bit of a soft start. And typically, the selling season, depending on what market you're in, but nationally, we really look at the spring selling season kicking off after Super Bowl Sunday. And I think January was pretty disappointing, and into February, it's gotten a little bit better. What we're probably looking at year-over-year for many of the production builders down 15, 20% year-over-year, despite new-home sale data just came out that it was only down 1%. 

I think what we're seeing is, especially dependent on the markets that we're in, bigger declines, and whether that's, you know, consumers sitting on the sidelines because they're concerned about all of the headwinds that you mentioned, I think that's a real factor. I also think that the lack of affordability is definitely the number one factor. People start getting worried about their own jobs. They'll definitely reconsider making that move today. 

So I really think that the wall of worry, starting with jobs and risk of overall job pressure, I think the deportation will impact the labor force for, no question, for the construction industry. Many of the builders today are very complacent about it. 

They addressed all of the illegal construction workers back when the first Trump administration came in, and we had ICE raids, and that they've done a lot more on e-verification. So they seem not very concerned about it. But when you really dig in with them, and you talk to maybe the ones that don't have the public-facing aspects to concern themselves with, they're like, "Well, problem is our trades, even though they're large and we know that they're in good shape, they sub a lot out. So we're not really sure what happens downstream." 

So that deportation risk will create inflation. It's already a tight workforce, given we have an aging workforce, that is very much the case in the trade. So whether it's roofers or drywallers, so it's already a constraint environment. So that's a risk. 

LIZ ANN: What percentage of the construction workforce is estimated to be undocumented workers?

IVY: The estimates were, back in pre-GFC, as many as four out of seven. Now we're told one to two out of seven. But no one has any good numbers around those. I mean, those are just sort of anecdotes.

LIZ ANN: I've also heard anecdotally that in certain states it's a higher share. 

IVY: Right. 

LIZ ANN: And I want to eventually ask you about California and the fires, but I thought I saw a number somewhere around 30% of the construction workforce is undocumented. 

IVY: Depending on the market, it might even be north of that, but like market like Phoenix or parts of Texas, I would imagine, also in the Florida markets, you've got a higher prevalence. But the numbers again that I haven't felt confident to really use those numbers, but I think the general sense is it's lower than it was pre-GFC, and they have a better handle on it. And I wouldn't say that that's affecting the consumer. When we look at what's affecting the consumer, the fear of tariffs probably don't affect the consumer right at this moment, but the builders are also already starting to push back on building product suppliers and telling them that we need to renegotiate contracts, and the building product manufacturers and distributors are kind of like, "We're going to pass it through." And the question is, "Will you be able to?" And I think there's going to be a bit of pressure for builders to take certain price increases, like lumber from Canada. They'll have to take those price increases. They have no choice.

And then in other cases, they might change suppliers, and there will be a bit of price wars going on out there, and we think that will come to fruition, and then there's a complacency, "Oh that's just a tool that, you know, the Trump administration is using. Their bite is not anywhere near as bad as their bark." And so that's really not necessarily in, I think, the housing industry yet. It's talked about.

And then when you think about what's happening in D.C. with layoffs, there's also complacency there. You know, it's a little bit less so, but more, "OK, we've got 11% of federal workers in the D.C. metro market that could be at risk." And if that's the number, let's say 10% gets laid off, that's not that big a deal. And we're not seeing anything yet. We've talked to many builders that haven't experienced backlog falling out. There have been some contracts that have fallen out with existing home brokers. We've heard about a small amount. People have lost their job, and they're not moving forward. But think about that homeowner today that might've gotten, you know, pink slip that's being let go. They don't move right away. They get severance. They probably are good through September. And even then, they might start looking for a job. And then when they can't find a job, they might reconsider moving. But those that are in contract that can get out of it, that's already happening. 

Or traffic and, you know, overall conversion hasn't yet slowed, but I would imagine that's later this year when we start to see the impact, more so the expectation in Maryland versus Virginia, but I think that's also optimistic because Virginia is very heavy in defense, and now that we have the defense budget at risk, 8% per year, I think Virginia will feel it too, but again, the industry is still somewhat optimistic that there won't be a big consequence from all these federal layoffs.

LIZ ANN: Now I did see, I think it was Zillow-related data that covered some semblance of the D.C. area saying that listings had increased and that price reductions had also kicked in beyond just any normal rate of price reductions. First of all, can you corroborate that, and is it too soon to point to these federal worker layoffs as a reason for one or both of those phenomena?

IVY: You know, we saw all that data that seemed somewhat sensationalized, and we just have not seen the increases in listings that we can corroborate with that and say that actually has come to fruition, nor the price cut. So we have not been able to confirm that data. And I think, you know, who knows if there's a few homes here and there and you've got one-offs, but we have not been able to confirm that data.

LIZ ANN: You mentioned the California fires, so talk a little bit more specifically on that. We know that the regulatory backdrop in California is a bit more stringent than maybe other parts of the country, and the governor did talk about easing some of those restrictions to get the rebuilding back on track more quickly. So what are you seeing—it's still early—in trends happening in those most-ravaged parts of the LA area?

IVY: You know, there's been very little activity as of yet. There's a lot of planning going, on and I've seen some proposals, the idea of using more factory-built where there is opportunity and/or manufactured housing even from more of the entry-level priced homes. But I think the relaxation of the very tight regulations there will not be enough from what the builder community believes. It needs more than just a few, and I think that the industry says there has to be a lot more. This will take maybe a decade before they can rebuild in that area sufficiently. But again, it's pretty early. 

And I know that the concern is, too, we've got an insurance crisis for the homeowner. Maybe the insurance industry is not going to be wiped out as a result of what's happened in California. But what we know are premiums are set to rise pretty substantially, which is this is another headwind that I think we're faced as consumers within various parts of the country, California, Florida being the most obvious. So I don't know necessarily that that's going to happen overnight, but I know that there's concern on the rebuild that maybe there's ways to use better products that are more fire-retardant, and there's lots of people, I think, gathering together to determine what best product would be suited there. And in the Palisades, which, the higher end, many of those homeowners are custom homes, we're looking at capped insurance coverage up to $3 million from the state-run agency. So those are factors that will play into the rebuild to contemplate, but it's very, very early innings.

LIZ ANN: You mentioned a little bit earlier the obvious migration that happened in the early part of the pandemic when there was more acceptability of work from home. So there was more flexibility and a big migration to the Sunbelt. I happened to be one of those people. It wasn't just tied to the pandemic, but my husband retired. My kids were at, we lived in Darien, Connecticut. They were out of the schools, were in college, beyond college. So we sold our Connecticut house, and we moved to Naples, Florida. So we were one of those. Any interesting more recent migration trends happening among the states, region-to-region, that you're seeing, and if they're particularly unique, what are the characteristics behind why migration is happening from one place to another?

IVY: You know, the migration trends, we were just looking at them, and United Van Lines puts out annual data on that because you can't get the ACS, which is the Census Bureau data. We still only have data at the end of '23. We don't have anything more recent, but United Van Lines has come out with a report showing that the major Sunbelt markets that benefited from the COVID surge have already normalized and in some cases are even below where they were. 

And what I think that just is about probably obviously people going back to work in the office, but also the lack of affordability and how much home prices have increased in those markets. So I think, you know, the Naples example—I'm in Naples too—but I think you're seeing softness in places like Naples right now. I think the market's fatigued, and they don't have as much inbound, and whether the congestion, you know, is pretty significant, and many markets that had this big influx of people, the restaurants, the schools, they can't support as many of the new incomers. And I think that's put some pressure and maybe made it less attractive than it had been. A lot of that, again, going back to lack of affordability. 

I've encouraged people, look at the Midwest, you know, it's very affordable. And we are seeing more strength now in the Midwest. And I think that's a function of what the value of those homes offer relative to income. It's very substantially different, much more affordable in many of those Midwestern markets.

I don't know that we're seeing it yet, but I guess with insurance risk, whether it's climate change, I never talk about if it's God-made or man-made, but it's happening. 

LIZ ANN: It's happening, right?

IVY: It's the heat waves. It's the flooding. It's the fires, and people, "Where can I go where I don't have to worry about those things?" And I think we're going to see people moving back to the center of the country to avoid some of those factors. And insurance, like my kids said to me, my kids are in school and one's out, but they're like, "Mom, we've been telling you about climate change since we were in middle school, and you guys didn't care. Dad and you were like, whatever." And I'm like, "Well, the reality is that now it's impacting the industry because of what's happening to homeowners insurance." So now we're starting to look at that as a real catalyst for people to contemplate whether or not they want to stay in markets. 

LIZ ANN: Are builders more broadly, I don't want to say taking advantage of some of the climate-change-related problems that have impacted fires in California, hurricanes, which more recently, as you know, having a place in Naples, have been flood problems, not wind problems. So I was reading some things about California and some of the homes that were saved. And it was a function of the customization that was done in many cases driven by the homeowner telling the builder, "I want fireproof." But are there, is there anything unique happening with some of the builders in those areas that are saying, "Here is how we're fabricating homes now in a very, very different way?" I know one of the things, we're building a house right now, and in the garage, which is where most of the water went for people that didn't also get it into their homes, forget drywalling your garage walls. You're just keeping them cement. You're painting the cement and just materials that are being used. Is there anything unique that the home builders are doing to, maybe not get ahead of this, but keep up with the pace of damage caused by climate change?

IVY: Well, you know, the builders would tell you they are and that the new home is much less likely to be impacted by any climate-type events. In fact, Governor DeSantis did a study on where there was new construction relative to the existing market, and that the new-home market held up better during various storms, hurricanes. And so that's already happening. And they're even talking about maybe having lower insurance premiums for new homes because of the advantages or lack of same risk factors in the existing home. And I don't know necessarily that that's happened yet, but that's something that is likely to come to fruition as insurers are focused on mitigating risk, the builders are seeing better performance, and they are using, not 100% fire-proof products or flood-proof products, but their product in their overall construction is definitely less at risk than an existing homeowner that a home that's, you know, let's say 10 years or plus or older.

LIZ ANN: You mentioned, several times for good reason, housing affordability, which I guess are sort of three legs to the housing affordability stool: one being mortgage rates, then of course the prices of homes, and then the income that homeowners or buyers are generating. We've talked a lot about the headwinds to real estate. What are the tailwinds? Obviously mortgage rates coming down on the margin would help, but when we move to the close of some of these conversations that we have on the podcast, I'm always mindful because there's so much focus on "What are the risks? What are the problems?" that we try to close out with a little bit more optimism. So this is the, we've had a lot of discussion of the headwinds, maybe what do you see as the most important tailwinds behind the industry?

IVY: Well, I think that, today, when we look at the aging stock, the housing stock is, you know, 45, 50 years old in the United States. And I think that today there are opportunities for consumers to, you know, maybe remodel those homes with all the equity they've had. And so there is a tailwind from the equity appreciation that they've enjoyed. When you look at the burden and typically take, let's say, 30% of income, how much of homeowners today spend more than 30% of their income on their mortgage? And it's at historic lows right now—only 23% are spending more than 30% of their income on their mortgage and all costs related. That in comparison to renters that spend more than 30% is over 55%. So when you just see the advantages the homeowners have and all that equity appreciation, I think remodeling should do well. That actually was a huge pandemic winner. And after now getting sort of normalized back, even below trend line—we look at it relative to overall consumer spending—it's now under-punching, where it had been way above. So I think the remodeling market should do well, and it hasn't been. It's been soft. So I'm looking for a rebound there. I do think that the value that the builders are offering is an opportunity for consumers today. If they're looking for homes, they should focus on the new home market because that's where those, again, mortgage rate buy-downs create affordability.

I'm trying to think of other things. We've got demographics. If we could find a way to create affordability, there's certainly a lot of decoupling that should happen. Going back to when I was growing up, anyone between the ages of 18 and 34, about 15, 16% still lived with their parents. Today, that's over 21%. So we could have an unlocking of household growth if we actually saw a more affordable offering out there, which, you know, again, the builders are trying to solve for. I'm not sure there's anything that can really happen from the federal government, but at least there's discussions now. So for example, Trump during his campaign talked about the total land in the United States. Thirty percent is owned by the federal government. Is there a way to utilize that land? We're less optimistic about that just because it's way out there, you know, so far that the trades wouldn't want to go, as well as the consumer may not want to drive that far to qualify.

But I do think that the conversation is on the table, and a lot of the challenges for the industry start at the local level. So maybe there's an opportunity for the government to subsidize local governments rather than pushing it all to the developer. So just having the conversation and so much attention could create some tailwinds for the industry that haven't been prevalent. But demographics certainly, with household growth we're estimating to be 12% this decade, would justify more supply, and if we can solve for that in any way, I think that would be very positive for the consumer.

LIZ ANN: One final question I have for you. How directly tied to the macro-outlook for real estate is the action of the homebuilding stocks? How much of a proxy does that represent? We know sectors and industries can have wild moves in the market that can't really be explained by fundamentals over that short period of time. But I know you track the homebuilders, obviously, but how much of that, the action in those stocks, informs your bigger picture view on the real estate market?

IVY: It's not so much the action of the stocks. It's really our focus on the long end of the curve, and they move in tandem. So as we see rates backing up, historically, the builders will underperform, and as rates rally, the builders will outperform. Yesterday is a great example. You know, the 10-year had a big move, and my stocks were up anywhere from 2 to there was one up 20%. And so it's very much, you know, maybe a lot of short covering, but it's really tied to the 10-year, which is reflective of what the economy is doing. And right now, if the builders are seeing softness and the activity for the spring selling season has been disappointing, that is somewhat a reflection of what the consumer's feeling. And so people utilize it as a leading indicator. And it's the two tied together. I think if the homebuilders were selling off for no reason, and the rates were not backing up, it would probably be about something specific to maybe an input cost like lumber, something that would be a factor of their overall margins might be at risk.

But we certainly think the housing market is a leading indicator for the economy, but it starts with the 10-year before actually the stocks.

LIZ ANN: Yeah, totally agree. Well, Ivy, thank you so much for joining us. I went through everything and then some on my list. All my follow-ups, I've got check marks next to everything. We covered a tremendous amount. So really appreciate your time. Thank you.

IVY: Well, thanks for having me. A lot of fun.

KATHY: OK, that was great, Liz Ann. So looking ahead to next week, what's on your radar?

LIZ ANN: When we started this, Kathy, part of our conversation, I mentioned the Purchasing Manager's Index information that we get, that you get a snapshot of what's going on both on the services side and the manufacturing side. So we get a bunch of PMIs both from S&P Global, an update to their most recent readings, and then we get the Institute for Supply Management version of those as well. We also get factory orders, durable goods orders, cap goods orders. So that is a line into the manufacturing side of the economy We get Challenger job cuts. Those have been pretty benign for quite some time, but that may start to jump onto folks' radar screens. We've got obviously the weekly claims data, and then we get the jobs report, which is certainly on everybody's radar. What about you? What's on your radar?

KATHY: Yeah, I think the jobs report is definitely high on the list of things for me. And that will give us the next look before the next Fed meeting. The folks at the Fed are going to have to come up with a new dot plot and new economic projections. And it'll be interesting to see at their next meeting how they deal with all the uncertainty that's still out there. Because by then we still may not have a budget.

We're still in the midst of all these policy changes that are taking place in a rapid-fire motion. And they're going to have to put pen to paper and come up with some numbers. So that's going to be really interesting. But I think for now, the jobs numbers will be the big thing. I don't think we'll learn anything from various Fed speakers. Keeping an eye on just what's going on in Washington, to tell you the truth, because that's where all the news is coming from right now.

So keeping a close eye on that and a close eye on our colleague Mike Townsend and his WashingtonWise podcast and various writings because he's the one who keeps us up to date on all that.

LIZ ANN: He's our "phone-a-friend" when we get deep-dive questions on government policy and prospects thereof.

KATHY: Yeah, poor guy. I think he's the busiest man at Schwab right now. 

LIZ ANN: 100%.

KATHY: He's all over the place. 

So that's it for us this week. Thanks for listening. As always, you can keep up with us in real time on social media. I'm @KathyJones—that's Kathy with a K—on X and LinkedIn. And of course, you can read all of our written reports, including charts and graphs, at schwab.com/learn.

LIZ ANN: And I'm @LizAnnSonders on X and LinkedIn. I'm only on those platforms. So be mindful of the imposters. And also, if you don't mind, take a moment to follow On Investing in your listening app of choice so you get an alert when a new episode drops. And we're always grateful if you would leave us a rating or review. Those really help new listeners discover the show. And we will be back next week with another episode.

KATHY: For important disclosures, see the show notes or visit schwab.com/OnInvesting, where you can also find the transcript.

[1] The "smile states" is a nickname for the Sun Belt, a region of the United States that stretches from the Southwest to the Carolinas.

[2] Mergers & acquisitions