The REAL Reason Behind Housing Shortages: Uncovering the Truth
Download MP3As you know, on this channel, we talk a lot about the home building industry and the contractor industry. There are a couple of news items that are really insightful about what's happening with that industry. One is building costs. Whether it's lumber prices or labor costs, this has been an issue for a while. Newsweek has a really good piece about how home building costs are in a "death spiral." What do they mean by that? We're going to jump down to the article now. Stay tuned because right after this, we'll look at how it may take four years to get permits for a property in one area of California.
Also, in California, they talk about the cost of home building reaching record highs in San Jose. This reflects a larger problem across the U.S. A new report from San Jose found that builders are facing numerous challenges due to economic pressures, higher interest rates, and material and labor costs. The cost of building one unit of affordable housing in San Jose is about three-quarters of a million to almost a million dollars. For affordable housing, it's supposed to be affordable, but it costs a million dollars. If it costs that much to build, how much do you have to sell it for or rent it for in order to make it worth doing?
If there's no market to sell that house for, let's say, 1.5 million dollars or to rent it for $10,000 a month, there's no point in a builder just putting one shovel in the ground to dig dirt. If you're going to spend three-quarters of a million to a million bucks to build a house, first of all, you have the carrying cost, the speculation risk, and the selling cost — realtor commissions, closing costs, that kind of thing. So unless you're going to be able to sell it for 1.2, 1.4, maybe 1.5 million dollars, there's no point in digging your shovel in the ground because it's just going to be doing work for free. That's why there's no houses being built now.
Right down the street in San Francisco, there's another problem: affluent NIMBYs (Not In My Backyard). These are people who don't want new homes being built near them or new apartment complexes. But there's more to it than that. It's not just that people don't want new buildings; it's that the builders can't get a deal done. Here's one example: a company wanted to build a 500-unit building for homes on what was originally a parking lot. This process took two years of delays, and after that much time, the cost shot up so much that the project is no longer financially viable. If that deal had been done two or three years ago, the cost might have penciled out.
Here's one that's worse: someone wanted to build a 3,155-unit building in the Bay Area, but it took a 12-year delay in the courts because people objected to it, and the permit system took that long. This is creating a domino effect. There's a state law in California that says you have to build so much affordable housing or new units, but if the delays make it so that no units are built, the city will face consequences such as losing state funds, being fined by the courts, and losing authority to determine land use. This can create even more delays in that city.
The bottom line is that these types of rules, regulations, laws, and costs are not just exclusive to California. It's starting to spread to other areas, and this is something that's holding back the housing market. The reason that home prices have gone up so much is that there's still a two- to five-million home deficit in the country for the number of houses that are needed versus how many are currently livable. The only place new houses are created is from new home construction. Homes are built by builders and contractors, not like cars, where there are factories that build new Toyotas, new Hondas, or new Chevrolets.
If there's no way to viably build homes in a short period of time, there's still going to be a shortage. More people need homes, and that's going to shoot the price of individual homes up, especially in the face of higher interest rates, where no one's going to be able to afford a house anymore.