Single-family construction headwinds

I suspect that single-family construction will continue to face headwinds. Every location is a trade-off between transportation costs and structure costs, and the components of suburban transportation costs (cars + gasoline) have gone up a lot over the past year. Interest rates are up, and thus so are financing costs. Car insurance rates also up substantially. Cars are also becoming more capital intensive, due to vehicle electrification. People are bringing down their fuel costs by paying more up front but taking on more financing costs to be able to pay more up front.

Remote work won't save the single-family home market. The pandemic induced wave of remote work has crested and is receding. The tide is still coming in, but this particular wave is ebbing. And with it, the need for an extra bedroom to use as a home office. No one who bought a house during the pandemic is going to shift back to urban living, but the number of people making that transition is going to drop off.

The cost of reversing the transition from urban renter to suburban owner is forbiddingly expensive: Transaction costs of home purchase impose a financial cost, home improvement customizations create sunk costs, etc. But the cost of making that transition in the first place is also costly--a second car becomes a practical necessity.

On Redeveloping Single Family

Many years ago, I worked on analyzing when real estate would redevelop, and the analysis simply ignored single family homes, because they rarely redevelop. As long as you have land to spare, you can simply add more building. And in many cases, adding another story is also trivial. So it's not until you run up against fire code for wooden structures (at five stories) and 100% lot coverage that demolition and replacement is a better alternative to a structural retrofit.  And that's a greater level of density than 99% of America.

Of course, doing that is illegal almost everywhere. Partially for good reasons (fire code). But you can see the dynamic in action in wealth neighborhoods--where people aren't running afoul of unit limits, parking requirements, or non-related family status laws. People just keep adding on extensions, with some minimal setback from the neighbor's house. Generates terrible internal floorplans over time, so eventually someone guts everything inside the walls, improves the foundation, and builds something of similar dimensions but much better quality. Without various zoning laws, the same dynamic would apply to multifamily, but we can't have Those People in Our Nice Owner-Occupied Single-Family Neighborhood.