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Taylor Morrison CEO on how the pandemic has impacted the housing sector

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Sheryl Palmer, chairman & CEO of Taylor Morrison, joins Yahoo Finance to discuss the outlook on the housing sector.

Video Transcript

JULIE HYMAN: We know that the housing market has been hot, particularly over the last six months and particularly in suburban markets. Homebuilder Taylor Morrison has benefited from that-- in the fourth quarter, net sales orders up 46%. And the company had, as of the end of the quarter, an 8,400-home backlog-- so a lot of demand for its homes. Sheryl Palmer is joining us now. She's the Taylor Morrison chairman and CEO. Sheryl, thanks for being here.

I want to start on what you're seeing in interest rates because I know that's something that a lot of equity investors are concerned about. And I'm sure it's something you're watching closely as well. Are you starting to see mortgage rates creep up? And is that having any kind of effect on demand, or is it actually causing sort of a late rush as people try to get it in before rates go up even more?

SHERYL PALMER: Good morning, Julie. Thanks for having me here today. We have seen some movement over the last couple of weeks of interest rates, and it's always about the speed in which things move. But to give you some perspective, if I think about a year ago, fourth quarter, in our earnings call earlier this year, I reported that the consumer, given how low interest rates were in, you know, fourth-quarter '20 over fourth-quarter '19, still had probably $40,000 to $45,000 in buying power from the prior year.

Now, you roll into first quarter, and we've seen interest rates certainly move to somewhere right around 3%-- historically, still very, very low. The way I probably think about it, Julie, is, you know, 1% of interest for [AUDIO OUT] movement can have the effect of about-- or really a quarter point can have the effect of about $10,000 in buying power. And so when I look year over year from where we are to a year ago, the consumer has certainly lost some of that in the last couple of weeks but still doing pretty well.

The other important fact about interest rates is when I think about what the consumer's buying today-- I mean, the old American way is if you could afford $300,000 or $400,000, you bought-- you spent 300 or 400. Today, the consumer-- when we look at our backlog, and you mentioned that, Julie, coming in. We had over 8,500 in our backlog at the end of the year.

When we test our backlog, our conventional buyers can afford somewhere between 500 and 700 basis points more in interest rate, our FHA, 300 to 500 basis points. Or said another way, they could actually buy a much larger house.

BRIAN SOZZI: Sheryl, the rise in rates, how has that changed affordability for first-time homeowners?

SHERYL PALMER: Well, certainly they're gonna be the most impacted. Once again, when I look at the FHA buyers-- so let's say that's the most affordable, and we have many buyers today, given what's happened to FHA limits. We have a lot more buyers that can go FHA but choose not to because of the interest impacts or the insurance impacts.

But it's gonna have a greater impact on them. But once again, if I look at those FHA buyers, they could actually afford 300, 400 more basis points in interest rate. Now, being able to and wanting to emotionally are two very different things. But as interest rates move, it will certainly have an impact. But when we look at the expectations over the next 12 to 24 months, I don't think we're gonna see the speed of change that we've seen over these last few weeks. We're expecting interest rates to stay generally in the range they are now through 2021.

MYLES UDLAND: And, you know, Sheryl, when you look broadly at the market, particularly its supply dynamics right now, there's been a lot of folks flagging that inventory is just disappearing off the market right now. Your backlog certainly suggests that there is robust demand on the other side of that as well. How have you guys thought about that as a multiyear challenge of how much more aggressive you want to be versus still maintaining discipline through the cycle, which I think, you know, a lot of homebuilders are gonna be very focused on given, you know, sort of how everything went 15, 20 years ago?

SHERYL PALMER: Yeah, it's always a balancing act. And the demand across all markets, across all consumer groups, is very, very strong. We are seeing it with that first-time buyer, and we can talk about all the different reasons that's happening coming out of COVID. We're seeing the 55 active adult lifestyle buyer coming back.

But it's a balancing act. We're making sure that we kind of manage our sales paces to our production capacity. But if you go back to where we entered even last year before COVID, we came into the year so very strong. And really, all the macroeconomic factors were in our-- were working for us. And I would say that's true today.

When I look at the demographic tailwinds, I expect demand to keep going. We've been underbuilding for so many years in this country that even at the pace we're building to today, it will take us years to catch up for the underbuilding we've been doing.

JULIE HYMAN: So, Sheryl, given the pace of building, and also given the fact that we've seen things like lumber prices start to move higher, what do you expect to happen on price? Are you all gonna hold the line on price? Do you expect to be able to raise prices somewhat this year? What do you predict?

SHERYL PALMER: Yeah, we've seen some nice pricing power over the last many months. I expect that we'll continue to see that, probably not at the same level. It's always a balancing act, right, because you want to make sure that you can keep your pricing ahead of cost. And right now, the market has done that.

Lumber, to your point, has been on the rise. And you saw it happened at the end of last year. It settled back, and we saw it kind of move up again. And futures, I think, are starting to point down a little bit.

So we'll try to keep that in check, recognizing we're all working to make sure we can bring affordable product to market. And you see that in different products and different product types. You're seeing it in more attached product. You're seeing simpler specifications.

So yeah, it's all a balancing act about keeping prices as affordable as we can but at the same time making sure we can keep up with the cost inflation.

BRIAN SOZZI: Sheryl, we've seen a large number of people migrate out of California. Where are these people going?

SHERYL PALMER: We are seeing that. You're absolutely right. We're seeing it in our markets. We're seeing it a lot in Arizona. We're seeing it in Texas. We're seeing it in Nevada.

And even though we're seeing that migration, we're also seeing very robust sales in California. I mean, there is a mystique around California that people will always love. But we are seeing it be a very nice feeder to a number of our Southwest markets.

JULIE HYMAN: Sheryl, thanks for being here today. Sheryl Palmer is the CEO of Taylor Morrison, giving us some insight into what's going on in the housing market. Appreciate it.