Labor--getting it, paying for it, retaining it, and profiting on the backs of it--grabbed most of new residential construction's headlines this year. Not without good reason.
But two other "L" words played, and will continue share equal--if not higher--billing in the 2014 through 2017 drama that's unfolding, as housing lunges and flops toward a new normal equilibrium.
They are lots and loans.
Labor and lots are two of the three critical resources housing must keep access to for viable, thriving sustenance (the other being "loans"). They're the housing ecosystem's equivalent of air, water, and warmth, necessities for a home to stay viable. They're how Housing, writ large, and its divisible parts, define resilience. Yet, they're always in flux, at issue, and, currently, in a state of limbo.
Each pretends to behave according to free enterprise market rules. However, masking both access to trade and subcontractor crews and residential building sites is layer upon layer of asymmetry, giving the advantage of knowledge and ultimate edge in most transactions to sellers.
Oh, but yes, very early on in housing recovery cycles, buyers of labor and acquirers of land may be in the drivers' seat. The move from Zero to Stage One may put builders with cash at a significant advantage over both land sellers and contract labor. But, as soon as the engines kick on, pffft, there goes the edge.
At issue here is this. The market--to date--has been largely inefficient at introducing a wave of low-priced new homes into the mix of for-sale inventory. This traces back to the challenge new residential developers and builders face in accessing their three vital resources for viability--lots, labor, and loans.
Outlier performers--ones who are exceptional at securing and deploying capital, crews, and a lot pipeline--are Darwinian winners. Others fall into the vortex of knowledge asymmetries--where the sellers, the lenders, and the contractors use their inside intelligence on what a foot of frontage is worth, what a dollar of invested capital should yield, and what a framer should cost per unit, to leave buyers, borrowers, and hirers to twist in the wind.
A must-read for insight into what's really going on behind the headlines about home building's labor capacity constraints is Barry LePatner's "Broken Buildings, Busted Budgets, How to Fix America's Trillion-Dollar Construction Industry," (University of Chicago Press).
What comes through in LePatner's analysis is the notion that the free market for construction labor, as such, is an illusion. So, too, is the free market for access to building lots and acquisition, construction, and development loans.
In each case, complexities, regulations, legacy practices, hidden agendas, and out-and-out tactics of deceit and deception may be at work. The "buyers"--in this case home builders and developers--as often as not, don't know what they don't know about what their dollars should pay for when it comes to labor, lots, and loans.
This makes life fascinating for those of us who live in this space as observers. We can surmise that firms and organizations whose cultures and processes are resilient--i.e. capable of securing and availing of ongoing access to labor, lots, and loans--will withstand the latest barrage of headwinds and uncertainties. Others, however, may not survive this kind of recovery.