The Expert Podcast

So the real estate market is on fire people are needing houses there's a shortage of homes across the country why aren't builders taking advantage of it and building houses to fill up the market to supply the demand that's out there you would think that with a shortage of homes and house prices going through the roof that builders would be out there just making new houses that they could sell whether it's a large builder like lennar or kb homes or any of the other major um home developers or even regional developers that build two or three houses at a time you would think that if there's a demand build houses it's not like if you build a house in six months the demand is going to go away everybody knows that the demand is going to be there for some time well here's a very good reason why this demand is not being fulfilled in that fashion.

A couple articles to look at one we're going to talk about home construction another one that will talk about lumber prices u.s home construction boom is excluding a big group of americans what is that group it is leaving one group out in the cold buyers and renters seeking affordable housing in walkable semi-urban neighborhoods what that means is suburban subdivision type homes doesn't have to be on 10 acres but just not in downtown they're being left out why wouldn't a builder just construct a house in the subdivision there's plenty of lots there's infill lots and build something they can sell for two or three four hundred thousand well there's one huge obstacle and it's it's more than just lumber prices it's more than even just labor availability you know as a general contractor we see every day the difficulty in finding enough labor enough workers enough framers even tradesmen electrical plumbing hvac but that can be solved you can solve those problems what you can't solve is the fixed cost baseline cost.
What does that mean well in order to build a house in many parts of the country excluding the cost of the lot and the cost of building the house and all the materials and labor there are some fixed costs which go to every house no matter how big it is doesn't matter if it's a 10 million dollar house or a 800 square foot house there are permit fees impact fees there are environmental fees in some places in some parts of the country southern california is a good example the base fees for building a house even if you own the land and on everything else can be 150 thousand dollars just for the fees in many parts of the country it could be sixty seventy thousand dollars just in fees utility hookup fees permit fees taxes impact fees many municipalities and jurisdictions require offsets for affordable housing where if you're not building a house that is for low income then you have to contribute to a fund which supports low-income housing that requirement by itself hurts availability of low-income housing because builders can't build.

Look at the house in this picture in this article small this is actually a duplex i i i believe looks like there's two sides of this house in order to build this house if each side was let's say 700 square feet which is kind of what it looks like 1400 square foot duplex if your building cost was 180 000 per square foot even 200 000 square foot you have 280 000 dollars just in construction cost well that would still be an affordable house now you add in the land well the land might be another fifty thousand or forty thousand so now you have three hundred and twenty thousand in cost let's say the builder wants a 20 markup fair right for their management so now you're at 360. well for 360 000 for an affordable house that's not bad for a duplex that's not bad but if you add on a hundred and thousand dollars or 120 000 in impact fees now all of a sudden you have a 500 000 house you have a half a million dollar house that puts it out of the budget.

Look all the other market fees that are out there for labor for lumber those things can be overcome the market can withstand those because it varies based on the complexity of the house if you want to build a cheap simple house you can cut back on labor you don't have as much trade work you don't have as much carpentry to build moldings and high-end furnishings and that kind of thing you can also cut back on stainless steel appliances or granite counter tops or any of the other high-end furnishings that go into a house to make it an affordable house a cheap house but the impact fees and the taxes and the permit fees are going to be the same basically no matter what and if those things are 100 120 130 000 now that house no matter how cheap you build it is going to be outside of the range of affordable housing if you have a house that you can sell for 300 320 somebody can get a mortgage for maybe fifteen hundred dollars sixteen hundred dollars that's an affordable house that's less than rent for most people if you have a house that sells for five hundred thousand now all of a sudden your mortgage is going to be 2 500 and the taxes are higher insurance is higher and that puts it out of range for an affordable house for blue-collar middle-class people.

So how do you make that math work well as a builder if you are building for a middle class or affordable house type market you may be able to get some incentives from the government same government is charging the fees if you commit to having a transaction price that is not necessarily market-based but within a certain percentage of the median income for that area you may be able to get offsets for some of those taxes and fees as a home builder if you are a client somebody who's building your own house it's very likely those fees are going to be baked into your price so one of the other options is to do a remodel or addition you're still going to have permit fees if you put an addition on a building or remodel however the impact fees for a new construction may not be there your utility hookups are already going to be in place.

The problem is that doesn't help the economy in creating a new household a new residential unit and it's kind of a catch-22 where the government and the market wants new housing units to come on line but they actually make it cheaper to fix up an old house rather than build a new house it doesn't make any sense so if you're looking to construct a new home it might be cheaper for you to buy a teardown or a fixer-upper or a house that's really just has no value and build a new home on that property rather than buying vacant land in fact you'll see that in a lot of high-end areas south florida boca raton there's perfectly good houses there's a house right now in appleby street boca raton that is perfectly saleable house it's been run down built in the 1970s asking about a million dollars but it's a tear down somebody's going to buy and rip the house down because it'll be cheaper to build on that lot it's a more desirable lot than it is to get all the permits and fees and and impacts for new construction on empty lot and there are empty lots available summer california same thing between the coastal commission builder impact fees environmental reviews it could be two hundred thousand dollars before you even break ground for a lot not counting the price at a lot that does nothing to get new projects new home units new residential units online those fees are what's holding it back and they're they're looking now at maybe offsetting some of those fees but that's the big hold up.

In addition in locations where those processes add time as well as fees even though it's not a hard cost in dollars it thwarts the market it it holds back the market because look if you're a home builder and you want to do a project you want to churn out these projects you want to get your house done in seven eight months and have it be saleable because you can predict your cost you can predict the market most construction loans are 12 to 14 months max so if you're a builder and you're you have a construction loan that is a conversion to permanent construction to permanent you can't let it go much longer than that so if you're in a market where the permits and approvals and fees and impact and coastal commission everything else it's going to take you two years you might as well not even build because you have to build it for cash you can't do construction loans and that's going to keep you from picking that area to build you might as well build in a place where you can get it done quickly.

In a lot of north texas northern dallas dallas suburbs you'll see a lot that'll be empty and from the time they start scratching around in the dirt to do site work and and grading and excavation until somebody's turning the key in the door it could be 60 days we've seen houses and even commercial properties from breaking ground to turning a key be 60 days sometimes 90 days for a complicated project that's why the development adding units in those parts of the country happens faster than it does in places where there's a lot of bureaucracy and cost and impact fees.

Let's talk about lumber prices this is a measurement of a commodity market for lumber of what is happening with lumber prices look at the volatility right here's lumber this is a board feet measurement 900 down 29 3 this is a daily measurement the volatility is what's hurting the market it's not so much the high price because if you know the price is high you can price your house accordingly in reality the price of lumber by itself might affect the price of a house ten thousand fifteen thousand maybe a little bit more and if you buy the lumber over time during the ups and downs it it may not affect it that much the bigger problem is the other materials copper goes into the electrical and plumbing appliances labor and the permit fees have a bigger effect on the price of a house than the lumber and the market the market value.

Look at the builders who are cancelling contracts they had a contract let's say from a buyer for four hundred thousand dollars um the buyers waiting for their house to get built six months later the house is done ready to close and all of a sudden they get a letter that says we're canceling your contract we're repricing the house at 480 000 either pay that or sell it to somebody else the lumber price didn't make it go up to 480. sure there may have been lumber increases during that build cycle but the bigger problem is the market the demand who's willing to pay more you can blame it on lumber all you want lumber has small factor in it but the real issue is the supply and demand supply is being held back mostly by procedural and policy decisions impact fees permit fees taxes and the zoning to allow houses to go up and the delays that that takes.

Builders are wanting to build contractors are wanting to do work the two things that hold back the most are availability of labor and that's something that has to do with policy and the permit fees and the permit turnaround time to build a new house look at our next video that talks about the musical chairs metaphor for housing market right now there are five million more people that want to buy houses than their house is available builders could build that five million houses with the right incentives with the right market and i'm not talking about incentives where they need money from the government they don't need welfare or rebates or incentive checks they just need an open playing field where they can build let the builders and contractors build.

Another area that has a little bit of a factor is work comp where you need workers compensation insurance for builders because it's a hazardous industry there's some obstacles there but the bigger issue is that this missing middle of homes this median homes you don't need to build just a cheap little shack you're talking about houses 12 to 1400 square feet in a cluster neighborhood not attached homes or townhomes detached single-family homes and it's hard to build those homes in a lot of places some areas are easier texas florida arizona there's a little more wiggle room to be able to build those level of houses but in many metro areas that have the biggest housing problems biggest homeless problems biggest affordability problems california oregon new york northeast illinois place where people want to go it's very hard to build those median houses because of the obstacles of policy some of the policies are well-meaning some of them weren't intended to have this but that's where a lot of government policies have unintended consequences that the private sector has to try to work around.

The private sector is trying to solve the problem the private sector private companies want to create supply they want to create the solution that's what they're in business for they make money doing that when there's obstacles placed outside of their control it's very difficult when you have a business where there's five million buyers that want to buy something that doesn't exist that's like a gold mine there are five million people that want to buy houses that don't have available inventory if you're in a business that sold anything beanie babies and there's five million buyers of beanie babies you'd find a way to to be able to produce that product real estate housing is like that beanie baby there's people that want them and they're it's an expensive profitable product it's a product that the home builder general contractor can make money on so they want to do it it's just that there's impossibilities created just in the math of permit fees and impact fees to make it difficult for a contractor to build houses in that range so what do you do you build an 800 000 house or a million dollar house where you can absorb that 100 or 120 000 in fees and still make a profit sadly taking houses away from the people who really need it in the middle class blue collar family type buyers you.