In this episode of the REconomy podcast from First American, Chief Economist Mark Fleming and Deputy Chief Economist Odeta Kushi discuss the headwinds home builders face as they try to ramp up new home construction amid today’s strong demand for housing and an historic housing supply shortage.
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“One of the dynamics that might happen in over the next year or so is that the attractiveness of what used to be considered unattractive buildable land on the exurban fringe might now begin to look attractive from a builders perspective because our work and commute patterns may have changed more permanently post-pandemic.” – Mark Fleming, chief economist at First American
Transcript
Odeta Kushi: Hello, and welcome back to another episode of the REconomy podcast where we discuss economic issues that impact real estate, housing and affordability. I'm Odeta Kushi, deputy chief economist at First American and here with me is Mark Fleming, chief economist at First American Hi, Mark.
Mark Fleming: Hi, Odeta.
Odeta Kushi: Well, you've probably heard quite a bit about the housing supply shortage. And, if you haven't heard about the shortage, you may at least have noticed that house prices around you seems to be going higher and higher. Now, the main reason for that is a decade-long imbalance between housing supply and demand. So today, we'll be talking about some of the headwinds to building more homes. Let's just call them the four L's: labor, land, lumber, and laws. And we'll start with the first labor. Mark, what's the issue? Why can't we get more construction workers? Do we have enough construction workers? I guess, is the first question.
Mark Fleming: I mean, we can't find enough construction workers because we actually need to build a lot more homes, even more than we have historically built in normal and good times. And that actually has to do with the fact that we've had a long decade of increased demand for not just home ownership, but shelter in general, all of the demographic demand from millennials over the last decade, forming new households, has driven up the demand not only for single family homes for people to own, but lots and lots of rental units. In fact, broadly speaking, demand for shelter has increased dramatically. At the same time, as you point out, the amount of construction is underperforming even normal levels, partially due to a lack of labor. You can think of it from a deficit and debt perspective. The debt is the total amount of accumulated deficits. For the last decade, we've been running deficits of not building enough each year to even keep up with the new demand for housing, add all those deficits up, and that creates a significant debt. So, the run rate of a million new homes built a year, that's just not enough. It's just not enough.
Odeta Kushi: So we need to fill the deficit is what you're saying, and build our way.
Mark Fleming: Build our way out of it.
Odeta Kushi: Yeah, absolutely. And it seems like this will be an ongoing issue, because as we know, millennials continue to form households, and baby boomers are living longer than ever. And so we'll continue to form households. And it seems that new home building really needs to keep up the pace. And labor has been one of the major headwinds to building more homes, you need more construction workers in order to build more homes. And, as we recently found, if you look at the ratio of housing starts, so that's the number of new homes breaking ground, relative to construction employment, you know, prior to the pandemic, that was about 1.4 starts per construction worker in the timer period between the Great Recession and just prior to the pandemic. But, before the Great Recession that ratio hovered at around two starts per worker. So pretty low in comparison.
Mark Fleming: Wait, you're talking about the P word?
Odeta Kushi: Productivity.
Mark Fleming: Right. So, fancy ratios aside, the question we're trying to figure out here is, how many homes, can be built by a certain amount of workers? Oh yeah, remember my old 80s references in the last podcast? Remember the Tootsie Pop commercial? How many licks does it take to get to the center of a Tootsie Pop? It's something like that. How many workers do we need to build one house? That's about productivity. And hey, guess what? Has that really changed in the last 50 years? Think back to the middle of the 20th century? How do we build a home, we brought a bunch of supplies to a site, a bunch of labor put this stuff in kind of the same way as today. In fact, where have the big enhancements been in terms of productivity? Well, there's things like the nail gun, that probably helps to some degree, but you still need a human to know where to point it. And so, we have this challenge of basically a lack of any significant productivity growth over the last half century or so in the housing sector. This is still an extremely labor-intensive industry space. It requires a lot of labor to build a house and that hasn't changed.
Odeta Kushi: And that's a great point, Mark. It does not lend itself well to automation and outsourcing. So, the only way to build more homes is to bring more people to the job – more hammers, more homes.
Mark Fleming: I gotta I gotta ask a question because you mentioned outsourcing. You mean, we can't outsource home building? Oh, that's right. It’s because I need the home built here, not somewhere else.
Odeta Kushi: Exactly. It’s unique to the housing market that you can't do that. And so certainly the way to increase homebuilding is to bring more people to work. And, unfortunately, in the aftermath of the Great Recession, the construction industry lost a large number of workers. During the recession, the construction industry lost about one and a half million jobs. If you look at the pre-recession peak to the trough, it's over well over 2 million jobs. And, it's been very difficult to find workers to come back to the construction industry. And there's a couple of reasons for that. So one of the reasons is that millennials, the people that are entering the workforce, well, they're just not quite as interested in the construction industry. They want jobs that are less seasonal, less physical, and more in an office environment. And that's proving to be a challenge to the construction industry. Because again, they need to attract millennials to work in this field. The other reason is an aging workforce. A lot of those people that lost their jobs in the Great Recession, they retired, they were older, and they haven't been able to retain or get those workers back. So, it's been very difficult to attract new workers to this industry.
Mark Fleming: Well, where would we typically have gotten those workers in times past?
Odeta Kushi: Well, typically, in the past, I think right now, there's, there's a deep focus on getting that four-year degree moving away from the trades, and moving into college and office environments. And that's, unfortunately lends itself to difficulty finding construction workers.
Mark Fleming: Well, this is effectively the same dynamic that's at play more broadly across the across the economy in the sense that we're moving to being a more service sector-oriented economy and there are different levels of training to do those kinds of office jobs relative to manufacturing and construction jobs. As we pointed out, you know, with manufacturing, there's the opportunity to outsource it to other places to find the labor. With home construction, you can't outsource it. So you have to bring the labor to you, or back to my productivity comment, find a way to more efficiently utilize the labor that you have. And, you know, we had a little fun a few minutes ago with the idea that there had been no productivity enhancements. But now the pressure is on and we do see, because of this stress of not being able to find the labor to bring, the industry itself says, well, I need to find ways to increase productivity. Maybe the reason we didn't see that much productivity growth was there was no market pressure to make it happen until now. But modular homes – building components in factories and bringing them to the worksite. These are all things that are actively being experimented with today effectively to try and solve this problem – to increase the productivity of the labor because I can't simply add more labor.
Odeta Kushi: That's a really great point and I think eventually that will revolutionize the way that homebuilding is done. But, right now, we still need to put more people to work and a lot of different dynamics going into that.
Mark Fleming: Do you recall...
Odeta Kushi: Yes.
Mark Fleming: Do you recall or maybe you don't? Does anybody recall the old Sears and Roebuck catalogs. And in fact, at the turn of the 20th century, not the 21st century. So we're talking circa 1900s, early 1900s. You could buy a home in the Sears and Roebuck catalog. And they would build it modularly in a factory and bring it to you. And then you had to assemble it yourself. So in many ways, the question is, are we going back in time to Sears and Roebuck catalog era?
Odeta Kushi: You know, these trends do have a way of coming back around, but this is another reference that went way over my head. That's okay, that's okay. And so clearly a lot of issues in attracting more labor at this time. But with the longer run goal of being able to be more productive in the construction industry, hopefully through use of technology. But and I'll just briefly mention this, it is quite important, but we won't spend a lot of time on it. There is the issue of migrant workers. That's something immigration policy certainly has a lot to do with. A lot of immigrants that come to the US work in the construction industry. And so that has a bearing on the labor force in this industry.
Mark Fleming: That's not actually even construction industry specific. In fact, migration has played a major role throughout recent history in our economic productivity growth and our economic growth in general. In fact, the 80s and 90s we had a lot of migration for all kinds of industries. And that's one of the ways in which we've been able to grow. Growing GDP is a function of putting more people to work wherever you get them from, and putting each person more productively to work, you combine those two things in some way and that's how we get GDP growth.
Odeta Kushi: That's a really great point. Because when you start to see women enter the workforce, you also see in the data, a big boost in GDP growth productivity and that's really a function of women entering the workforce in large, larger numbers than ever before. And you can see that in the numbers. So that's a good point, immigration is also incredibly important to overall GDP growth, not specifically just to the construction industry. So moving past the labor, let's touch a little bit on land, one of the issues…
Mark Fleming: There's no land. I can't find any land.
Odeta Kushi: You summed it up. That's basically the gist of it. There's a lack of available lots. Not just available lots, but a lack of affordable lots. And that's particularly acute in some of the most desirable locations. So let's think maybe San Francisco, maybe we think of Boston, not a lot of places for builders to build. And that obviously results in increased lot prices and a headwind to building more homes.
Mark Fleming: We have to be a little bit more specific here. There's plenty of land in the United States of America. The problem is it's too far away from where we want to work and play. Interestingly, maybe that's a changing dynamic given the pandemic over the last year. But, what we did in the last half of the 20th century was basically expand suburbia, outside of the urban core, you know, think about all the big cities with all their inner and middle suburbs and areas like that. The GI Bill greatly expanded the suburban-urban landscape. Building was easy and inexpensive, because there was plenty of land that was in within reasonable commuting distance throughout the 50s, 60s and 70s. In fact, most major cities suburbs, you know, were built then. There was a big expansion, largely feeding and serving baby boomers at the time. Now, the challenge is either you infill develop, which is expensive, or you build on the urban or exurban fringe, but that's now pretty far away from most big cities, which reduces its desirability as a as a potential building site. Because do you really want to do that hour and a half commute back into Washington DC? Maybe not, unless you only have to do it two days a week. So I think one of the dynamics that might happen in over the next year or so is that the attractiveness of what used to be considered unattractive buildable land on the exurban fringe might now begin to look attractive from a builders perspective because our work and commute patterns may have changed more permanently post-pandemic.
Odeta Kushi: That's a great point. And I think that's also why housing tends to go hand in hand with the subject of transportation. Because, if you want to build further out from the urban core where the jobs are located, you really need to have a supportive transportation system to get people to and from the city. But...
Mark Fleming: Or a bigger road, just make the road bigger, keep on widening it, not a problem. Get the autonomous driving cars, easily solved.
Odeta Kushi: Automated.
Mark Fleming: Automated, that's right.
Odeta Kushi: Yes. So obviously, lack of affordable lots another headwind, and then we move into lumber. But more generally, this is rising material costs, we're focusing on lumber, because there's been an increase in the cost of lumber. Since about the beginning of the pandemic, it has risen dramatically over the course of kind of the last six to eight months. And that really threatens homebuilder's momentum. And so there was a recent NHB study that showed that the higher lumber prices added nearly $16,000 to the cost of a typical new single-family home, and over $6,000 for multifamily. And that was since about mid-April 2020. So obviously, this is another kind of cost-prohibitive issue that builders are facing in the industry right now. But, that's alongside rising material costs in other areas as well.
Mark Fleming: It's no surprise. Walk past your local home being built and you clearly see that there's a lot of lumber there. There's also a lot of waste of that lumber. And, again, as we talked earlier about the sort of the market driving the need to find productivity enhancements for labor, same thing here. If I can build the walls in a more efficient way with less waste, given the fact that my material costs are higher. There’s now more incentive to do it in a different way. And so again, the idea of modular manufacturing as a way to more efficiently use those expensive input resources, drives innovation, and I think that will continue if, a big if, if these construction input costs remain high.
Odeta Kushi: Absolutely. So, there's a focus on efficiency as well. Efficiency, productivity. And then there’s the last of our four L’s, which is actually laws. And what we're referring to here is regulatory burdens. And this is regulatory burdens imposed at all levels of government. So national, state, local, making it harder and more expensive for builders to build. Now, for those of you listening, you may have heard a little bit in this last year about Oregon. Oregon was one of the first states to pass legislation to eliminate exclusive single-family zoning. And this is because Oregon is a state that is suffering from a lack of supply. They need to build more homes. And one of the headwinds that they're facing are regulatory burdens in the way of zoning laws. And so this is something that we find results in an increase in the final price of a home. Again, there was a study from the National Association of Builders that showed that government regulations accounted for over 24% of the final price of a new single-family home. This is a little more difficult to address and likely needs to be done at the local level, but one of the biggest headwinds, I think, to building more homes.
Mark Fleming: Wait, not in my backyard. No.
Odeta Kushi: The NIMBYs.
Mark Fleming: And now, if anyone has paid attention, there are actually YIMBYs. Yes, in my backyard. So, an interesting dynamic, but you actually put your finger on it, and it relates back to the accessibility of land too. The ability to build has become significantly more expensive, as driven by regulatory zoning costs in general. And it varies very dramatically across the country. These are largely locally designed programs and locally implemented. And so actually, from a policy perspective, if we need to build more housing, it cannot be done at the federal level. It has to be done at the local level, because it's these regulatory and zoning restrictions that are making it more difficult to build, even though the demand is there, which is exacerbating our shortage problem. And one of the funniest things is, when you look at neighborhoods, and the degree or the level of regulatory costs that are involved at the local market level, it's correlated highly with income and homeownership. The higher the value of the homes, and the higher the homeownership rates, the more costly are the regulatory burdens to build in those neighborhoods. We like to say that the single largest special interest group in the United States is homeowners. Nearly two-thirds of all Americans are a member of this group. And it's homeowners that generally are very cautious about development happening in their neighborhoods, because it facilitates change. And change, it's often unclear whether it's going to be good or bad. There's a lot of that protectionism of your most important asset against the possibility of change in the form of development. Which is really the root cause of something that will not just persist in the short run, but will be a major theme in addressing a healthy housing market for years to come and that is how do we manage and balance all of these competing interests at the same time as providing enough shelter for all the people in this country who want it.
Odeta Kushi: Just one of the basic universal human rights, right? I mean, you have to have a place to live, it doesn't necessarily need to be homeownership, but you need a place to live, whether that's a multifamily development to rent, or it's a single-family home you buy. We need to be keeping pace with household formation. And this seems to be one of the biggest hurdles towards building more homes. It’s very much concentrated and it's not uniform across the US. We do find, when you look at some of these regulatory burdens, they seem to be concentrated in California and the East Coast. Unsurprisingly. So you see in Massachusetts, and even in Florida, we find higher regulatory burdens. These costs that the builders incur in the process are then passed on to the potential home buyer. And it's not just zoning, right, there are other costs incurred. There are permitting costs. There is the time it takes to get through the approval process. How long it takes for them to build. All of these things have a cost associated to it, and it's tough for them to build.
Mark Fleming: It feels like the old adage – time is money. Right. Time is money. So, it can be done either directly through money or through time, but this ends up being the same thing – money. But these are good problems. I mean, we talked about all these issues, but these are good problems to have in the building industry because the challenge is tons of demand and a struggle to meet it with the supply. I'd much rather be in that position than where the home construction sector was in the global financial crisis. The reason it contracted so much and the reason so much labor left the market was all of a sudden there was no demand. No demand anymore, relative to the supply. We're in exactly the opposite situation. Our challenge is, how do we meet the demand? And we like to say, build it and they will come.
Odeta Kushi: Absolutely. And I think that's a great way to end. Thank you, everyone, for joining us on this episode of the REconomy podcast. Be sure to subscribe on Apple, Google, Spotify, or your favorite podcast platform. You can also sign up for our blog at firstam.com/economics. And if you can't wait for the next episode, please follow us on Twitter. It's @OdetaKushi for me and @MFlemingEcon for Mark. Thank you and until next time.
Narrator: We hope you enjoyed this episode of the economy podcast from First American. For even more economic content, visit www.FirstAm.com/economics. This episode is copyright 2021 by First American Financial Corporation, all rights reserved. For more information, visit us at firstam.com
