The Expert Podcast

Okay, we all know that there's a lot of big things happening with the real estate market, right? The prices have skyrocketed, gone through the roof, and interest rates went up dramatically. They went from two point something percent to almost six or seven percent in some cases. What that's done to the building and contracting industry is it's put fear into the developers again. Remember back in 2008 and 2009 when the housing crash happened? Builders and developers shut everything down. They stopped building. Well, they never really came back to a large, fast-paced building volume that existed back in the 90s and early 2000s. Even after 2010, when the economy started to come back, they were very cautious getting back into the market. By 2018 or 2019, seven to eight years later, some builders were just now starting to build, but they still weren't diving back in with both feet like they did in the 90s and 2000s because they were still running scared, and they had a lot of painful memories from the housing crash.

So now, fast forward to 2022. In 2020 and 2021, there was a big demand. A lot of buyers wanted new homes. There was a housing shortage, and there still is a housing shortage. So builders tried to build as fast as they could, but there was a built-in resistance to overbuilding, and that resistance was supply chain and labor. Because if you were a builder, even if you wanted to build a hundred houses, there was not enough materials to build all the houses that the demand said you should. There was also not enough labor employees available to construct all these homes. If you're a general contractor like we are, the biggest problem is coming up with labor. So anyways, we've talked about that a lot before. But the main thing is, even though there was a huge demand in 2020 and 2021, the builders couldn't overbuild because there wasn't enough capacity.

So now, you get to 2022, and the interest rates start going up, and the prices are high. Builders start to maybe get a little cautious. Now, you get into March, April, and May of 2022, and the rates skyrocket, and demand drops off. Instead of there being no houses on the market and no inventory, with 10 to 20 bids on every house, now there are houses that sit for a month or two or three unsold. So, builders are saying, "We're out." Here’s an article from Forbes saying, "Home construction sinks as housing market demand quickly dries up." This happened almost overnight, and many builders are just going, "We're not doing anything on speculation." They don't want to get stuck like they did in 2008. Many of the builders that are around now, 10 to 15 years later after the housing crash, only made it through by the skin of their teeth. They know how close they came to bankruptcy, how close they came to getting wiped out. They saw many of their colleagues get wiped out when the demand dropped. They're not falling into that trap again, so they're not going to build.

So, what does that do? Well, in today's market, it's not really going to have a huge effect because there’s now some inventory. People are putting houses on the market. The prices are high. The prices haven’t come down and they probably won’t. Prices are not going to come down. There will be more inventory, and as a buyer, you might be able to get some more concessions. Like, you can do an inspection, where before the seller didn’t want you to do an inspection. Or you might be able to get a mortgage contingency, where in the past sellers just wanted you to pay cash. Or you might be able to look at a house and think about it for a week, because there’s not 20 other people waiting in line to buy that same house. But the prices aren’t going to come down. Builders aren’t going to build any more houses.

So, what is that going to do for the housing market? Well, one of the hidden shadow crises that’s happening in the U.S. is there is a housing crisis. There’s not enough houses to go around. There are more people that need a place to live than there are places to live. That’s why there’s a lot of homeless people, that’s why there’s a lot of evictions, and that’s why there’s a lot of people looking for houses. Some industry experts say that there are five million fewer homes than the market needs. Whether it’s that many or two or three million, doesn’t really matter. The problem is now that the homebuilding spigot has been shut off, there’s nothing that’s going to come online to try to backfill some of that 5 million shortage because builders are done. Builders are not building spec homes anymore.

Look, general contractors and builders have enough work doing remodels for clients, doing commissioned construction, meaning that a property owner comes to you and says, “Look, I want to build this house. Here’s my architect floor plan design, and I’m hiring you to be the builder for my house.” There’s enough of that work to go around. You don’t need to go build spec homes or mini subdivisions because you don’t know if the demand is going to be there, and that puts you at risk. At least with a commissioned house, you have a contract for a certain amount to build that house, and you get draws, and you get money coming in. So, you’re never really behind the eight ball.

It’s going to really put a damper on the housing market. If you think housing shortage and homelessness and rental rates are high now, wait three or four years. It’s going to be even worse then. So, this housing market slowdown is going to have more long-term effects than people realize, and a lot of building companies aren’t going to develop the additional employees they need for the future. You know, one of the shortages we have right now is skilled labor—people who know how to do framing and the skilled crafts that go into building a house. Well, if you’re a robust market and you need more employees to build houses, you can train people and bring them up through the ranks. Well, if the housing market’s shut down, you’re not going to have new people coming into the ranks. All you’re going to have is more people retiring over the next few years, and even in three or four years, it’ll be even worse—the labor shortage. So, this quick shutting off of the tap is going to have more long-term effects than just not having the extra new homes in the market right now.