The Expert Podcast

So what's going on with building permits and construction? There's a lot of misinformation out there and data that makes it seem like there's a big crash in home building, and maybe there is, but let's take a look at what the numbers are actually saying. Here's an article as an example from the Orange County Register that says California building permits drop 29% as home buying and rents cool, and October was the seventh slowest month for permitting since 2015. Now, based on seeing that, you might think there's a big crash in home building, right? That's the headline, and the subheadline says home building is deteriorating. But let's look at the numbers closely.

First of all, October was the seventh slowest month for permitting since 2015. Well, 2015 was about seven years ago, so that means that there were seven months slower in the last seven years—that's once a year. Well, look at building permits. Here's the actual building permits; we picked 2018 for the whole year. Well, if you look at the whole year of 2018, the slowest month is usually right around October. September and November are a little slower, but October of 2018 had 7,000 home permits. They're saying that 2022 had about the same—7,168. That's 2022. Here's 2021. I'm sorry, 2018, 7,151—it's almost exactly the same. So seven years later, the building permits are the same, and they're calling it a crash, right? Certainly, the number of permits being issued now is less because home prices have gone up and interest rates are up, but is it really a crash?

Well, let's look back to 2018. 2018 was 7,000. Two months later, in December, it was 10,000. In May, it was 12,000. Right? In February, it was 7,139, which is actually even less, but a couple of months later, it's almost double. It's seasonal. This is a normal amount for October in any year. 2018 was one of the biggest booms for construction in a long time. Even after a pullback, they say 29 percent, it's still higher than what it was. So the question is, is there really a pullback or not?

So what goes into demand and building permits? It has to do with: Are there new housing units needed? Do people need new homes? Well, obviously, the answer is yes. The question is, are they affordable? Can people buy them? Well, people are still buying houses. The rates are up, the prices are up, sure, they will probably pull back a little bit, but it doesn't change the fact that there are still an estimated 5 million more people in this country than there are houses. So, more houses are needed now. Aligning the price point with affordability is a different story, but the houses are still needed, right? Whether it's a reconstruction, new construction, remodel, whatever the case might be.

So before we jump to conclusions that the home building market is crashing, look at the actual numbers. I suspect that many builders are going to get away from speculative home building because it's unknown whether 2023 or 2024, people will be able to afford an 8 percent mortgage on a $400,000 house. So they might not do spec homes, but if you have a buyer that needs a house and you build it for them or if you have a remodel, that might keep the lights on. Look, builders have fixed overhead. You have equipment you need to amortize. You have insurance, rent, or mortgage on your office. You have employees. All that has to be paid for. So you have to do some deals. You can do it with less of a margin, but in the meantime, costs have gone up. Right? Even though the lumber prices have come down from their highs, they're still above where they were in 2018. And you have the demand destruction, where buyers are not able to afford an 8 percent mortgage on an average house. Right? Even a remodel, most people who remodel their house or put in an addition, they get their money from a home equity loan. They get it from borrowing against their house. So if the mortgage rates are 8 percent or 9 percent for a HELOC versus 2 or 3 percent, you may get less of that remodel money as well.

So there are certainly percentages you can say permits have gone down 20 percent, but if they went up 100 percent over the last year, you're still ahead of where it was. Before, the big question is going to be: Year over year, what is the total number of new homes constructed? And even if it does go down, that's not going to bode well for the housing demand in 2025 or 2026. If we stop building homes now, fewer people are going to be able to have homes two or three years from now, and that's going to be either more homeless or more rent-disadvantaged residents.