The Expert Podcast

We can all agree that a house is something that everybody needs. You need a roof over your head, four walls to keep out the wind and the rain, a place to maybe lay down and sleep, and hopefully a place to cook some meals. There are people who live in everything from a tent to hotel rooms, apartments, condominiums, homes, to large mansions. Everybody needs some kind of a house. We can all debate about how much of a house somebody should be able to have and what's fair and what's not fair, but everybody needs to have some kind of a house.

There is a problem though: there’s not enough to go around, which means some people don’t have a house, living outside, or they may have a house but it’s not really sufficient for their lifestyle. They may be living in a rundown apartment when they need something more substantial. The quick answer seems like, “Well, let’s just build more.” If you don’t have enough, build more. And obviously, there are businesses and companies whose entire existence is about making more houses: homebuilders, developers, contractors. So why not just build more houses?

You might think that it’s because they are too greedy, or they’re not making enough money, or they’re only building big houses. There’s some of that, but there’s a big difference between building a house and even making something like a cell phone, building furniture, or building a car. All of those just require materials, parts, some kind of a factory, some kind of a production facility, and that’s pretty much it. Real estate development is a little different.

First of all, you need the land. And believe it or not, there’s actually a decent amount of land out there. But even if you have the land, the development process starts with approvals, permits, zoning, development plans for that municipality, town, or city. And all of those take time and money. The problem is, as a developer or builder, you don’t have certainty. Look, if I wanted to build cell phones, I could line up contractors for all the parts: the chips, the screens, all the parts that go into a cell phone, and say I’m going to build them. You could plan out I can build 1,000 cell phones, I can build 500 dressers, or 100 cars, whatever it is, because it’s a known quantity.

With real estate, you are planning out one, two, or three years in advance, and you don’t know if your project’s going to get approved. There are a lot of variables in that time; a lot of things can happen with the market. Your sales cycle isn’t just a few months to sell a mobile device; you have to plan out years in advance. So, there is a financial calculation that goes into it, and that’s a risk factor. If interest rates go up, or if insurance rates are not affordable, you’re now stuck with that house. It’s not a liquid item. If you have too many cell phones, you can just sell them all on eBay or go to some liquidation company and dump them. You can’t really do that with real estate.

This is why building can’t be scaled up and down quickly. An article in MarketWatch gets into that. Builders face a murky landscape of construction. Builders would love to construct as many homes as possible because they make a profit on the houses, even if they have to make a smaller profit. Building more is what they do. When there are headwinds in building, some of the headwinds we’ve talked about are the development, the zoning, the permitting, the planning. Some of it is also the construction itself.

If you want to build a factory to build cell phones, all the parts and pieces are there. If you want to build a house, you need contractors, you need laborers, and you need people who know how to build the house. Those are in short supply. The other thing is it’s geographic. If you want to build a factory, all your construction is done in one place all the time for the next five years. You have one factory, you can just bring in people, and they can work there forever. With homebuilding, you’re going to build subdivisions all around the state, the county, or the country. So, you have to find people in different areas. People aren’t going to be moving every six months when you build another subdivision 100 miles away. So, the labor staffing is also an issue. There’s a big difference in the pipeline of construction for a home versus any other material product.

This is what slows it down, and all those factors are now aligned against building. In fact, there was a little bit of a reprieve when the housing market prices went up in 2021 and 2022. Builders said, “Hey, we can sell homes for more money,” but then interest rates went up, and the economy slowed down, and inflation went up. So, we’re kind of back to square one, where builders are a little hesitant because you spend 8 to 12 months building a house and have $200,000 to $300,000 worth of your capital tied up in that house, not counting the land. Then, you can’t sell it, and you have financial problems. You can’t just dump it on the market.

The reality, the financial reality, is that construction for single-family homes is not an elastic, scalable process. Apartments are a little less of a problem, but building something that doesn’t have a long-term benefit for the resident is problematic. They’re going to have to move in a few years when they get a different job, or when the rent goes up, or when they have kids, or whatever it is.

So, the permanent solution of single-family homes has a lot of headwinds, and a lot of uphill battles, which means there’s no easy solution in sight, especially at the rate the population is growing. So, don’t expect that there’s going to be a magic bullet. There are things that can help, but even if somebody waved a magic wand tomorrow and changed all the zoning and permitting laws to make it easier, it might be five or six years until all that works through the marketplace, and the homes are built. In that time, a lot can happen: rates could go up, the economy could go down, more people could be displaced by AI and don’t have a job. A lot of things can happen.

So, those other factors are the black swan events that could thwart the housing market.

Thank you for watching. Remember, you can access live one-on-one personal consultations with a licensed private investigator, a licensed commercial insurance broker, a licensed certified real estate title examiner, or a certified civil court mediator. So, if you have a need to talk to an expert in any of these fields, or even a licensed building general contractor, you can click the link below to actualhuman.com and arrange a live one-on-one, undivided attention with a licensed expert, where you can ask any questions, get information about your situation, and we’d be glad to help.