The Expert Podcast

In prior videos, we've talked about the housing market, affordable housing, and the housing shortage, and what goes into that. There's an excellent article from MarketWatch, one of the largest financial analyst-type publications, that asks the same question: why is it so difficult for builders to meet the demand for homes? We're not just talking about everyday, middle-of-the-road market-rate homes and high-end homes; we're talking about getting a volume of properties out there so that people who can't afford houses or workforce housing or getting homeless people off the streets can have a place to live.

Builders want to build houses. That's what we're in business for, right? If you're a commercial contractor or general contractor, you want to be building. It's not like you want to be sitting on your hands not doing anything. It's kind of like if you go to an ice cream shop and they don't sell ice cream—builders want to build houses. So why is there a shortage of houses, and why is it difficult for builders to build? Well, this article gets into those reasons.

Let's take a look at what they are. Number one is zoning. Not every property is eligible to build a house on. There may be restrictions on building a house or residential structure on a certain piece of land. It might have to do with the zoning being commercial versus residential or single-family versus multi-family. The zoning might also restrict it in terms of setbacks. If you have a piece of property that has 10-foot setbacks on either side and that only leaves you with 15 feet in the middle, it's not big enough to functionally build that house. There may also be zoning problems with things like utility access or easement access. Not every piece of property is eligible to build a home, plus there might be grandfathered-in use for that property that might restrict the ownership to build what they want.

Next is related, and it's building codes, but it's not exactly the same. Building codes put restrictions on what can be built on a property, even if it's zoned to be used for that purpose. The codes might not let you build in a certain way. For example, they might have certain limits on the height of the house, the aesthetics of the house, or where you can put a fence. Those codes might functionally restrict a builder or the homeowner from putting what they want on that property. By doing that, it slows down the process.

Building codes not only can prevent a property from being built, but they might also delay the property from getting all the approvals. The building codes, getting all the permits in place, might require that you go through a permit approval process. Instead of just filing a permit and getting it approved in a couple of weeks, it might take several months or even years to get that permit done, and that might functionally kill the project. If you're looking to build a multi-family home, say a 10-unit apartment complex or condo, and you know it's going to take you two years to get through zoning, the owner of the property, who's doing the development, might just say, "Forget it. I don't want to wait two years because my money is going to be at risk during that time."

If you're a speculative builder, the same thing applies. You might not want to go through that hassle because you don't even know for sure if you can do this deal until that permit is done. So it's a catch-22: do you go out and get your funding for it, not knowing if it could be done, or do you get the approval first and then worry about getting funding? Because if you get all the approvals and then find out you can't actually make the math work, either because the market is different at that point or maybe because construction costs are different, then you're out of luck. So building codes have a lot to do with it.

Then the other one is labor shortages. As we've talked about before, the number of skilled trades that are available, ready, willing, and able to work is a lot lower than is needed to build all these homes. If the shortage is, say, 5 million houses for affordable houses and workforce housing and getting homeless people off the streets, building 5 million homes is going to take a workforce of skilled trades. Not just general contractors or builder companies—you need a certain number of workers to do that, and the number of people that are out there right now are insufficient to do it.

I know what a lot of people say: "Well, if you paid more money..." Look, we have builders and colleagues that we know who are offering $80, $90, $100 an hour for skilled trades, and they're still not getting qualified people who know what they're doing enough to apply. Even if they do get somebody who barely scrapes together some history or experience, it's wishful thinking on the builder's part to hire them. They put them on payroll, they start paying them $80 or $90 an hour, but they still don't show up for work, and they still don't have the knowledge to actually do the job that they're hired for. So, builders want to pay people—we've run ads before, not quite that high, but $60 or $70 an hour—and still don't get any takers. And the few people that we do hire, half of them don't have the job experience or knowledge they represented. So we can never finish a project. Labor shortages are a big deal.

Lastly, building materials. Even though lumber prices have gone down and other materials have gone down, it's still not at a level where stability and sustainability are in the marketplace. So, if you build a house that costs, say, $200 a square foot or $240 a square foot to build, the market for selling that house may not be able to absorb that construction cost, both from building materials and labor. So the building material cost is part of it, but also the delays. If you know you're going to need certain roofing materials on a certain day and you put it into your job timeline and they don't show up, now everything after that is thrown off. You can't start doing paint, you can't start doing site work, so the delay throws off the timeline. And the timeline is a huge factor in getting that job done on budget because you're going to schedule all your subs and all your contractors one after another. You'll have framing, rough-in, sheetrock, inspections, and then final mechanics.

If one of those gets thrown off, now the whole schedule for the other subs has to be delayed. So if you scheduled, say, your plumber to come in after your framing is done, you might put some leeway in there—maybe a week or so—just for, you know, to fudge the dates. But now if your framing doesn't get done because there's no materials, you have to tell your plumber, "Look, I told you to come on April 12th, but we're not going to be ready. When are you available next?" It might be till June before they can come back. So it throws your whole timeline off, and that affects the price—not just the delivery date, but the price because of carrying costs, insurance, interest, and everything else.

These are the four factors that are putting a monkey wrench in the marketplace. The bottom line is that builders want to build stuff. That's what we're here for—to build properties. But if the other factors outside of our control, such as permit approvals, zoning, building materials, and, to some extent, workforce, don't allow us to do our job, it keeps a backlog of homes that are needed. That's going to affect the bigger economy, the prices of homes are going to continue to go up, and the number of people who can't afford affordable housing and are on the street or living in substandard accommodations is going to continue to rise until these things work themselves out.