Unraveling Our Tight Housing Market: Home Building

At last week’s National Association of Real Estate Editors’ conference, unsurprisingly, a lot of time focused on the state of the residential real estate market. The main drivers can be broken down into two large buckets that I’m further breaking down.  Part One focused on people and population issues, while this installment focuses on home construction.

The graphic above is a vivid illustration of all that’s wrong with homebuilding and the effects of extremely tight housing supplies and increasing prices.  For eight years we have built about half the housing units we need. Unfortunately, those were not eight years where humans stopped aging and young adults ceased wanting to get away from their Spiderman and Little Mermaid sheets.

Marrying eight years of substandard construction levels with eight years of household formation backlog plus relocations, and here we are.  Oh, and factor in that of the 850,000 average housing starts, only a tiny fraction were considered affordable to first-time buyers.  In other words, millions of newly legal 21 year olds turn up at the bar and find there’s one bottle of Jack to every 100 bottles of Dom Perignon. Back home for a snort of Dad’s dandelion wine you go.

Nationally, we’re 6.6 frigging million housing units short. That’s some honey-do list.

Housing Starts versus Household Growth

Illustrated above, you can vividly see how we got ourselves into this mess.  Equally, you can see how we’re only slowly making it better.  For every house constructed under 1.6 million, that’s a house we have to build on top of the year’s 1.6 million needed just to tread water.

So, yes, you’re seeing a lot of construction in Dallas, but it’s still way below where it would have been (and should be) had the Recession not occurred.  We just got used to nothing being built.

Not Building the Right Things

The last mid-priced high-rise in Dallas was converted from office to residential in 2007. According to the Harvard study, that’s not unusual because just 8 percent of newly built multi-family units … 29,000 units nationwide … were condos in any price point. We’re talking pre-1974 numbers when the concept of a condo was new.  The other 92 percent of multi-family construction? Apartments.  This often first rung on the property ladder is completely missing.

For those seeking a small single-family home (<1,800 square feet), it’s almost as hard to find.  Nationally, just 21 percent of new homes were sub-1,800 square feet compared to 37 percent in 1999.  Meanwhile, from 1999 to 2015 the share of McMansions (3,000-plus square feet) almost doubled from 17 to 31 percent.

Source: Workers Defense Project

Labor Shortages

The 2017 Harvard University study titled, The State of the Nation’s Housing reports that between 2007 and 2012 the construction industry lost 20 percent of its workforce. That low 7.2 million pool of workers had not increased by 2015, three years into the recovery. Cruising around town, every major construction site has help wanted signs unfurled.  Given the flat growth in construction workers, it’s safe to assume the workers who left construction, left for good.  And honestly, who can blame them? Facing years of unemployment and a feast-or-famine lifestyle, you’d look elsewhere too … especially if you were young.

Harvard reports that construction workers “under age 35 dropped by 34 percent and the number aged 35–44 shrank by 21 percent, while the number over age 45 declined by just 1.5 percent. As a result, the share of older workers increased from 33 percent to 41 percent over this period” (older workers have less opportunity to change careers).What this means is that as construction workers retire, there’s a weak back bench to replace them, pointing to years of underemployment in the field.  Many school districts — including Dallas ISD — are working with construction companies to increase interest in construction careers, and some constructions companies are offering on-site training.  Obviously this is slow-going.

Part of the reason construction workers aren’t coming back are the industry’s self-inflicted poor working conditions outlined in a 2017 report by the Workers Defense Project.  Of Dallas’ 245,796 construction workers, 42 percent report performing heavy labor for over eight hours per day and 86 percent report working overtime. Couple that with 38 percent reporting employers not offering any benefits with just a quarter being covered by an employer’s healthcare plan. And even if you sign up for all this, there’s a real possibility of having your wages stolen by being stiffed on overtime (28 percent), making less than the minimum wage, illegal paycheck deductions (15 percent) or just being stiffed altogether (13 percent). The “reward” for all this?  A $19,000 median income and hard labor in the Texas sun.

Lord knows what it’s like for those two percent of women construction workers.

Couple shortages with the potential for governmental interference with immigrants.  The National Association of Homebuilders pegs immigrant labor at 23 percent nationally while the Workers Defense Project says it’s nearer 63 percent in Dallas, and the situation could become a whole lot worse before it gets better.

The result is higher wages and perhaps better working conditions for those who remain. While a welcome bonus after years of starvation during the Recession, it ultimately increases the cost of housing.

Land Prices and Availability

We’ll keep this short and sweet.  Throughout the Metroplex, land prices are up. Based on desirability, they can be relatively minor (Southern Dallas) or staggering (Uptown). Increased land cost obviously fits into the equation of housing affordability.

Land availability is another matter.  In mature neighborhoods, NIMBY fighting is non-stop as developers try to increase density.  In my own neighborhood, I’m steeling myself for the upcoming fight to replace the Preston Place condos that burned in March of this year and surrounding properties. In Oak Lawn there’s the battle to downzone an area currently zoned for high-rises.

Add in an onerous permitting process and getting urban infill housing projects (where “everyone” wants to live) done is problematic.

Home Price Recovery

Overshadowing some of this is price recovery.  In real numbers, home prices have returned or grown from their 2007 peaks for approximately 75 percent of homeowners nationwide.  However, inflation-adjusted prices still lag.  This means mortgage holders are no longer under water but their home has not appreciated in buying power in over a decade.  That’s bad news for those nearing retirement who might want to tap into equity.

It’s also bad news for those wanting to trade up in housing.  With housing purchase power underperforming home real dollar prices, you’re likely to find the next jump up in house is too big to cross.  In the Dallas-Plano-Irving area, Harvard estimates that home prices have appreciated 24.9 percent since 2000 on average and 10.8 percent since their December 2016 peak. Looking back at sales data from my building, it’s not far off.  Certainly there are areas of greater and lesser increases. (Note: for all the HGTV focus on Waco, Harvard reports that home prices remain down three percent from their December 2006 peak.)

Trading-up is further (negatively) magnified if a homeowner’s current mortgage rate is lower than current rates.  This adds to the reality that people are staying put.

Source: Joint Centers for Housing Studies of Harvard University, The State of the Nation’s Housing 2017

Affordability

Dovetailing the conversation on housing availability is affordability.  Cheap is only cheap if it’s affordable to those it wants to attract.  Texas as a whole is no New York or Silicon Valley, but affordability is really the balance between wages and prices.  Texas wages aren’t market-leading, New York-level wages.  Adding to the affordability issue is the proliferation of high-end apartments that sap the potential for residents to save to own.

Nationwide, Harvard reports a 97 percent increase in the number of apartments renting for more than $2,000 per month from 2005 and 2015.  During the same period, apartments renting for less than $800 per month (which Texas used to be awash in) actually declined 2 percent, or 260,000 units.  From 2005 to 2015, overall rental units increased by 6.7 million units … and again, affordable units declined by 260,000.  As if that weren’t enough, median rents increased by 32 percent since 2000 … is your salary up 32 percent since 2000?  Saddening.

Conclusions

We’re not building enough. We’re building the wrong mix of housing units and price points. We’ve decimated a workforce with little short-term hope of increasing capacity. Oh, and we’re screwing the most vulnerable more than ever before. The only reason we can be doing so much wrong and still have a strong market is the sheer number of people looking for housing.

 

Remember:  High-rises, HOAs and renovation are my beat. But I also appreciate modern and historical architecture balanced against the YIMBY movement.  If you’re interested in hosting a Candysdirt.com Staff Meeting event, I’m your guy. In 2016 and 2017, the National Association of Real Estate Editors has recognized my writing with two Bronze (2016, 2017) and two Silver (2016, 2017) awards.  Have a story to tell or a marriage proposal to make?  Shoot me an email sharewithjon@candysdirt.com.