Real conversation involving an early 30-something.
"Rent's getting ridiculous, I gotta do something."
"You might think about buying. Prices are pretty fair here, and interest rates are dirt cheap. You'd be paying less per month to own."
"Out of the question. No down payment. Paying off a college loan. No credit rating to speak of."
"What are you going to do?"
"Roommates, maybe. Maybe move back in with the folks for a bit."
Ah, yes, "the folks."
Check out this infographic on how dramatically household composition has changed in four decades. Half of 18 to 23 year-olds live at home (with "the folks"), and 14% of 24 to 34 year-olds do.
This conversation and this data point speak volumes about this moment, not just for housing but for builders.
Which is my agenda this morning. It's about housing and what builders should do for housing as you see to your business of building houses.
Housing's technically, officially, and really in a state of recovery, right now. Sales volume is increasing in more markets. Prices are rising, pulling borrowers out of negative equity in many markets. Jobs are getting added and there's even growing evidence of wage growth in the economy. Household formations are gravitating toward norms.
There's another side to it.
And it may be a fact of life that as housing's recovery gets more and more of a grip, it draws a trenchant and more and more unsettling contrast to those recovery is leaving behind, passing by, forgetting, ignoring. Housing giant Ron Terwilliger has this manifesto on how "Housing is a Growing Source of Instability," even as we builders and developers see more and more signs of fundamentals repair, traction, and opportunity. Ron writes:
With mortgage credit tightening, the national homeownership rate has plummeted to a 48-year low. The homeownership rates for African-American and Hispanic households have fallen dramatically, while fewer first-time homebuyers are entering the market despite historically low interest rates. As if trapped in a vicious cycle, many young families are finding it difficult to save for a mortgage down payment because of rising rents.
These problems of rental affordability and homeownership access are likely to worsen over the next 15 years as millions of young Millennials, many of them African-American and Hispanic, form households for the first time.
The deplorable conditions in housing today should concern all of us, regardless of whether we are satisfied with our own personal housing situations. To me, three words summarize why this is so: Family. Community. Country.
Millions of well-housed parents with children of college age and older know all too well what their sons and daughters are up against. Skyrocketing rents, particularly in our major cities, are causing severe cases of sticker shock. When combined with student loan debt, these costs make the idea of saving enough for a mortgage down payment seem far-fetched. For parents of these young adults, housing is a very serious family concern.
It's crazy, but it can be said that even though recovery is happening in housing, its opposite is also gaining momentum. How can both be true? And how can expectations for builders and home building and developers and multifamily be strong and growing stronger, even as gravity pulls people farther and farther from hope in the American Dream?
Let's not make the mistake of thinking--reflexively--of this as a social, political, ideological issue. Let's rather consider it as a business issue, which it may well be.
We're seeing signs that the current "A Lot," 750-plus FICO, cash-flush, wants-not-needs housing recovery is getting long in the tooth. If we've learned nothing else about housing and real estate over the past 10 years, we've learned that it's a series of linkages--supply to demand; jobs to household formation; loans to the ability-to-repay them; and the daisy-chain of household types from financially-supported living, to market rate, to the various tiers of homeownership, starting with entry-level.
We may believe-because of appearances--that these linkages are not in play. But that's because we're human and prone to error. They're never not in play.
Fact is, two very strange paradoxes have showed up in the latest recovery. One is this, and it applies to square footage. Common sense might dictate that if one could divide 10,000 square feet of built residential space into 10 homes it would be worth more to the builder/developer than to divide that same 10,000 square feet into five homes.
It's a paradox in today's market that fewer homes with larger square footage are more profitable than greater density, smaller square footage homes.
Secondly, there's the mental paradox around supply and demand. One doesn't normally associate supply constraints as powerful enough inhibitors to hold back a housing juggernaut in the making. Today's market seems--counterintuitively--to be proving that scarcity of predictably and manageably priced labor and predictably and manageably priced lots can be as potent a suppressor of gains as a lack of willing or able buyers.
Fact is, if you're a "willing" buyer with a cap on what you're "able" to buy, then chances are that you're currently on the sidelines in the current market, because there's nothing out there for you.
Let's get back to the agenda, which is what builders can or should do about the fact that amidst the current home building recovery, there's simultaneously a housing downturn (albeit in some markets, submarkets, population segments, economic brackets, etc.).
My argument would be that home builders should do something about it because it would be best for their business if you do. Which is to say that if you don't, some geniuses will come up with models to address this need in ways that will further disrupt the home builder business model.
So, what can home builders do about the fact that recovery has put a swath of the population in its wake, including that 30-something who thinks roommates or living with "the folks" is the solution?
We have a piece in the works that looks deeply at the role local, regional, and national governments play in holding back recovery, thanks to regulations, fines, fees, and time sucks in the system. Maybe there's something builders and their representatives could do about that.
Let's focus on that. Let's not dismiss it as the province of ideology. It's a business issue too.