With confidence--amid the uncertainties of the moment--you may safely bet on the truth and helpfulness of two assertions. One is this: objects in the rearview mirror may be closer than they appear.
That's a classic caveat: don't always trust what your eyes and your brain tell you to think. Evidence our five senses provide fails, occasionally, to convey consequential and potentially life-altering meaning.
Another assertion might be of equal or greater significance to those who are trying to survive and thrive today and tomorrow as residential developers and home builders. It is this, and it comes from the economics and research team at the National Association of Home Builders.
The pool of potential new-home buyers is smaller--by about 30%--than it would appear. In absolute numbers, according to NAHB research guru Natalia Siniavskaia's top line analysis here, 48.4 million households will qualify for a mortgage to buy a new home, if ... regulations, impact fees, taxes, and other government-imposed costs did not add 24.3%--or an additional $84,000, in the case of the median priced new home in 2015--to the price tag. So, instead of almost 50 million households in the potential buyer universe for new homes, the actual, more realistic number given that 24.3% capital stack that goes to various government entities, is 34.4 million.
So, that's a big if, if ever there was one. The number of "priced-out" would-be potential buyer households is 14 million.
What that figure may not factor in is math that housing finance maven Ivy Zelman has done, taking a look at the effect of current Federal Housing Administration loan limits in many regions--which further squeeze out the first-time buyer portion of the home buyer universe because home builders can't put a home on a lot in some markets for an amount below those loan caps of FHA-backed mortgages.
We've been harping on this issue this week, partly because a perfectly good housing recovery--one that is slow, and steady, and purposeful--is at risk of losing momentum if builders can't start pipelining lower-priced homes into the highly-constrained supply of for-sale, single-family homes. As world economic gyrations and the resulting turbulence that volatility causes on Wall Street begin to curb enthusiasm in the luxury and ultra posh spectrum of the market, the entry-level starter home and first-time buyer market needs to kick in soon, or else. Interest rates may be at three-year lows, but they won't stay dirt cheap forever.
The feeling among most of the home builder executives I speak with is that there's not much that they can do about the high and rising cost of regulatory burden on the home sites and code-compliant vertical construction. That appears to be the given. Builders believe those costs are not going down; they're headed up. Rightly, they're looking at process improvement, data, technology, and innovation as necessary to bring down their own directs and overheads, while at the same time infusing greater value into their homes and communities. Doing more with less.
Where there appears to be "give" is in getting housing finance--namely, the FHA, to more fairly and accurately adjust loan limits in markets to levels that would allow a young, qualifiable buyer to borrow an FHA-backed amount that would be enough to purchase a new home at the median-price level in that market.
But the reason we've been harping on the issue is not that these circumstances and conditions are adverse and apt to get worse. It's that developers and builders can and should exercise their collective clout to do something about both the FHA loan limits and the regulatory overreach resulting fees, delays, and, ultimately, unattainable "entry-level" homes.
Believe us, the chronic labor capacity problem is one builders would much rather be wrestling with than the political and bureaucratic warren of rules, red-tape, and ruinous, death-by-a-thousand-cuts fees, taxes, and payments.
And while innovation will necessarily play a role in the ways that developers and builders continue to do more with less resource--money, time, talent--it's collaboration that is likely to be the sole recourse against the regulatory burden.
Have a look at this Harvard Business Review piece contributed by entrepreneur John Geraci, "How an Ecosystem Mindset Can Help People and Organizations Succeed." If builders and developers think this way about regulatory overreach, chances are they can reduce the "priced-out" slice of the new home buyer universe by 20% or more. That's the challenge.
Connect. Develop an action plan that aims both at the Federal Housing Finance Agency on loan limits, as Ivy's urging, and start zeroing in on the local planners, city council representatives, and agency representatives who are behind the particularly unreasonable and unwarranted governmental costs. Call them out. Ask them why they're willing to risk losing one of the most precious resources of all--young adults who want to and can restore vibrance and a sense of the future in their communities.