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.

The Great Housing Mismatch

We don't actually need more single family - it's already most of the stock. Sure, it's still being used, but increasingly by non-family households who would be equally happy with something else. But three incomes outbid two, so families are still having a tough time. We need to build massively larger amounts of multifamily to have any hope of aligning our household types with our house types.

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. 

Competing Urbanisms

Attached housing is a different way of living than detached housing. Shared systems means reliance on communal assets, and hence some governance method for managing those communal assets. If you are poor, and your neighbors are trashy, there is an insoluble communal action dilemma, a veritable prisoners dilemma. It only makes sense for you expend effort cleaning up the central lawn if everyone else does it. In cases like bungalow courts, the number of people involved is small enough that the small-group dynamics habits evolution has hardwired into humans can work it out. As the number of people increases, individual agency is diluted, no one is responsible, and you get The Projects.

*Arguably, attached townhomes would work...but most 'townhomes' are actually condos, from a legal/governance setting, with a condo board, so they have a method of managing communal assets.

Gotta build something

I was reading about housing starts today, and this phrase struck me:

Construction started on buildings with five or more units at an annual rate of 171,000 units, the highest level in two years. The rate of starts for single-family homes was the lowest in almost two years.

I find it tremendously cheering.  Five years ago, I remain the general despair at the thought of ever getting builders to shift toward developing multi-family properties. "No one will build multi-family, because developers have no experience at it". But the current oversupply of single family homes has changed that--if you've got a construction company, you've got to build something or go broke. Even if you fire everyone, you've still got cost of capital. So builders are switching.

The techniques for building town homes and condos really aren't that different from those used to build mansions and large house. Extra bedrooms, guest bathrooms, second kitchens, second furnaces and water heaters. Simply a matter of adding a few extra walls.

In the long-term, demand for single family homes will resume. But the skills for building decent multi-family units will have been developed, and that will do a lot to overcome the friction associated with developing TOD.