Why aren't builders building faster?

Question

Hi BP friends, The Problem In the Southern New Hampshire area, we have less than one month worth of inventory available on the MLS. THIS IS NOT NORMAL! there should be 6 months available for a stable market. Now I know this is not a secluded problem this is a Nationwide problem especially a problem in the nice suburbs. This is also the winter season, so yes there should be a slow/dip in the inventory. Even with this as a consideration less than a month of inventory is not a good market for almost anyone unless you are selling your second home. The Solution Build more homes! Simple. Why aren't we building a S***load of more homes? Is land just too stupidly expensive? Do we not have enough builders? Do investors just want to wholesales and or flip? WHY aren't we building more homes!???? Closing Statement We need to get together and develop some land because when there are no homes to sell well we need to just sell lots and give everyone a hammer so they can go to town. What do you think is not allowing more developers to develop?

Shannon Robnett · Answer

@Jonathan Ramos you are correct it is a problem happening in a lot of areas around the nation and there are really quite a few factors that need to be looked at to truly appreciate the magnitude of it. In order to do so, we need to go back to the great recession and the 10-year blood bath for the real estate developer. We came out of 2013 with a need for 1.5M housing units that had not been built from 2008-2012 for many reasons related to the global meltdown. since then we finally get the fires of the economy stoked and rolling again but there are supply and demand issues. So as we have seen the demand go up for workers and tradesman we have realized that from 208-2015 while we were going through the great recession all our tradesman had been retiring, retraining for a different line of work, or failing to recruit new apprentices. Today our labor workforce for tradesmen is at a seriously depleted level only to be paired with record demand and housing prices. Where can they afford to live around the jobs that they are building? And it all starts with the projected need for developed ground and actual availability. And for 8+ years nobody developed any new subdivisions. Developing a subdivision is typically an 18-24 month process so when demand finally began to climb we were 24 months before anything new was online. In that time frame, the inventory was gobbled up, so lot prices began to climb rather rapidly. Supply and demand in Boise Idaho have been on the seller's side for about 3 years now but Covid really knocked it out of whack in a bad way. We all froze for 3 months in March and watched what was going to happen to take a bad thing and making it worse. New construction starts dipped by 40% YoY in April throwing an already thin market into a tailspin. We have seen serious migration from the larger cities where higher-paid workers are exiting in mass and taking their jobs with them. They have created bidding wars for what was available to resettle their families in areas with wide-open spaces and less regulation on activities. People who have been chained to a city for a paycheck have decided to free themselves to finally pursue the move to a local they have always wanted. This sounds great right! But now we have even more competition and at the end of the day, your labor force loses out and has to move further away to a less expensive place they can afford. This makes the staffing of the projects you want to be built even harder and more expensive. This cycle is giving bankers and appraisers fits in keeping up with pricing and FHA limits and all the other issues of a rising economy. I say all that to say it's not just as simple as developing some land and getting builders involved but in the next 24 months, you will see things start to normalize. That is if we didn't in all of this just add to the shortage we had to start with?

Shannon Robnett · Answer

@Jonathan Ramos I think you misunderstood me I was not advocating one way or another I was simply stating what had happened and what will continue to happen with our current construction cycle.But did the overall cost of housing really increase? I mean I get that the amount the house is purchased at has increased but take a deeper look at the true cost of ownership. 3 examples 2006 you could have bought a 3 bed 2 bath for $175k in Boise Idahoand put an 8% mortgage on it and paid $1284 monthly and in 30 years you would have paid $462K for the house. In 2017 you could have bought the same house and paid $250K for the house with a 5% mortgage leaving you with a payment of $1342. In 30 years the house would have cost you $483k. And lastly in 2020 you could have bought the same house for $350K at 2.75% interest and in 30 years you would have paid $514K for it. So when we look at our economy did your house really go up in value $175K? Did you money go down in value sure because of the fed pumping fiat currency? or Have you really only seen a moderate rise in total cost of 30 year ownership($52K divided by 22 years is 2.6% appreciation) but your monthly housing ownership cost appreciated even less?

Jay Hinrichs · Answer

@Joe Splitrock thanks for the mention @Shannon Robnett spelled it out pretty accurately in my mind. if we just look at history and the PDX market for instance.. this market from about 92 to 2007 was building 10 to 12k doors a YEAR in new construction.. with about 60% or a little more going to SFR.. In 2009 the total number of permits pulled in the 2 million metro area was 700.... SEVEN HUNDRED so you had all sorts of upheaval in the industry from builders folding up..Banks foreclosing people moving because no construction jobs.. Cities had no land use applications they laid off left and right etc.. then you had a slow bounce back next year maybe 1,500 then the next 2,500 so on and so forth so by 2014 or so this area is behind by 40,000 housing units.. Cities and counties have to try to staff up again.. then of course what do cities and counties do when there is nothing to work on.. they do deep dives into their code and of course they don't make it more developer friendly they go the opposite way :).. Lastly prior to 07 builders that were half way decent needed ZERO money into SFR builds as banks would do 80% LTC.. and so on.. That all changed to were the banks started requiring skin in the game and they were not going to go way out on a limb with Spec loans.. Banks have long memories. And many of the builders who were experienced had to reorganize and banks took loss's so they were not able to go to those money sources.. and HML did not get into new construction until about 3 to 4 years ago.. So this really opened up the flood gates for the big nationwide public company builders that swooped in and really cleaned up.. then you have what everyone is seeing now.. material prices sky rocket.. Labor goes way up.. land has bottomed and come back up.. 2 to 3 years to prosecute a bare piece of ground before you can go vertical.. So here we are.. for us in this market you basically cant buy a shovel ready buildable lot for under 125k each.. build cost for SFR are at 120 to 150 a foot.. so without cost of capital and profit a 2k sq house is going to cost about 400k just to bring to market.. and well we are not NON profit or at least we hope we are not.. and there you go. now townhouses and high density can do a little better in pricing.. but that product is the first to stall when things start to tighten and with the lovely PDX politics down town condos are really tough right now.

Shannon Robnett · Answer

@Jay Hinrichs you are like Paul Harvey!!! And now for the rest of the story! Development is not as simple as turning on a switch!

Matt Devincenzo · Answer

This is a bigger queation than can be addressed on a forum post, but the simple summary is it has become complex to build housing of any type. Housing was a crux of 'the American Dream' post WW2, and we completed a lot of it. Since then we've slowly but surely increased the complexity of development/building. The issues range from environmental, to energy efficiency, to safety, to material supply and a host of others. IMO where we are today overall is where we are very likely to stay generally speaking. Urbanized communities simply can't suddenly deregulate in a manner meaningful enough that the market shifts that dramatically.

Michael Guzik · Answer

Great post and great question! @Jonathan Ramos. I love what @Shannon Robnett said first and he explained it in more depth and detail than I ever could. Here in San Antonio there are a few reasons development has slowed down or not been able to meet demand. The first reason is pushback from people who are living in the area/neighborhoods/conservation associations. I can give a practical example we bought 1/3 of an acre and were planning to build 8 urban homes. The neighborhood threw a HUGE tantrum and because of that we were only able to build 3-4. We were "lucky" to be able to build multiple homes instead of the community we wanted. So instead of building eight 400k homes now we are building 3-4 600-800k homes. So much for "affordable housing" LOL! The pushback for new development in the inner city is still present and has created a speed bump for sure but is nothing that can't be overcome. The second reason I can think of and in my opinion the biggest reason why developments have slowed down, is that banks/construction lenders were scared sh*tless to lend on new construction during COVID. We were cruising along pre-COVID to build a 20 unit townhome community in downtown San Antonio. The lender was going to lend on the whole project at first... but COVID happened and now they will only lend one building at a time and we have to sell at least 50% of the building before we can start the next one. Thank God we were able to perservere and still afford to continue the development but many smaller developers/builders really suffered because of this. We managed to get private money from investors in our network to speed things up and we are almost back on track. However that was a HUGE setback and a pain in the a$$. This is all just applicable to the small world I work in for urban infill development downtown but that's what I have seen and experienced so far. Still lots of room for opportunity and we are building custom projects all over the city and lots/land are selling like hot cakes in those areas! It is so hard to find good land anywhere for my clients and the families that was us to build for them. I think it all ties back to what Shannon said earlier though!

Chelsea Conley · Answer

@Michael Ketchen Dover has always seemed a step ahead (Adu laws etc.) that’s amazing! I’d love to hear more about this project, Inching towards tiny home (New England’s specialized version) can be a huge win for the area! Workforce housing and beyond

Jay Hinrichs · Answer

Hey now you stole my Paul Harvey line most not sure many of the members even know who Paul Harvey was !!! But yesLots of reasons we are were we are in the development game..and I dont have a magic answer for affordable housing.. I think there will be a limited amount that is heavily subsidized but in the free market pretty tough for all the reasons discussed on this thread.

Evan Polaski · Answer

@Jonathan Ramos, in my opinion it comes down to many things Shannon addresses and Joe adds to. Labor costs are very high, and material costs are very high. Add to that the trend of migrations to early ring suburbs (read move out of urban core to get space, but still want to be able to walk to a couple restaurants and coffee shop), and you are placing a lot demand in typically fully developed areas. So you can get into row homes and suburban condos, but that is not what people are looking for.And then you get into the fact that COVID only exaggerated the sellers market we were in already. Sellers don't want to have countless people through their house, if they don't need to. But buyers want out of condos and dense living.

Jonathan Ramos · Answer

@Shannon Robnett I completely understand what you are saying I was in the Commercial Real Estate development side of things and yes many of the projects in the cities that had broken ground have to finish but there was a ton of uncertainty and in the big cities to some extent there still is. I am seeing exactly what you are saying happen in our town. Prices skyrocketing nearly 20% in one year a 700k new construction home down the street of my house sold in 72 hrs! We need a quicker solution. Can we convert hotels into apartment buildings? What are quicker and faster solutions. I understand the Single-family home will always be the caveat of real estate for consumers but many are looking to downsize but unfortunately can only find 2000+ sq homes that are barely cheaper than where they currently live many just say ITS NOT WORTH IT. We need to build for the workforce and for the people looking to downsize homes in my market new homes/condos under 400k do not exist. I believe developers can build a 2-bed condo for 400k sales price IMO but they rather rent them. As much as I am an investor we are not building communities anymore we are just letting people sleep in a room temporarily then kicking them out or raising rents. At least when Fannie Mae first started they had guidelines on how a community should be built and planning boards would allow a million rentals. There are issues with developers, zoning, workforce, community, and most importantly affordability. And we need a solution now.