Land

A Land Reset Can Lower Costs, But It'll Also Take A New Deal With Locals

Innovations to lower building costs will only get builders and developers part of the way to affordability. Disruptive deals to engage local property owners in enlightened self-interest will also need to happen.

Land

A Land Reset Can Lower Costs, But It'll Also Take A New Deal With Locals

Innovations to lower building costs will only get builders and developers part of the way to affordability. Disruptive deals to engage local property owners in enlightened self-interest will also need to happen.

September 26th, 2022
A Land Reset Can Lower Costs, But It'll Also Take A New Deal With Locals
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The stories – from competing daily newspaper brands with global impact, the New York Times and The Wall Street Journal – fit together, hand in glove.

One asks a rhetorical question. The other gives a rhetorical answer.

Both pieces contain multitudes where housing's interests are concerned, and should be required reading.

In the NYT, Emily Badger, a business trends reporter with a strong pedigree in covering U.S. household demographics, housing, urban and equality, writes a piece that led the Times' coverage over at least a portion of the past weekend, "Whatever happened to the Starter Home?"

In the WSJ, Konrad Putzier, a real estate reporter out of The Real Deal stable of news and analysis burrows deeply into land valuation, zoning, and regulatory factors in his featured story, "The U.S. Is Running Short of Land for Housing."

Had the editor of a business title devoted specifically to housing, residential development, home construction, and investment the budget and time resources, the two stories together would have made brilliant companion pieces as equal parts of a special report focused on challenges that loom at least as large and menacingly for housing business leaders as the Federal Reserve's monetary and fiscal policy pathway and quantitative tightening.

For all the near- and mid-term havoc the Fed's moves on interest rates, commercial borrowing costs, and mortgage backed securities will wreak on homebuilders' and their residential development and building products partners' business plans, these two companion piece stories illuminate a root-level challenge that clouds the longer term prosperity and growth opportunity for those firms.

At their core, where one of the stories ends and the other begins, lies the $20 trillion question facing businesses whose livelihood and prosperity hinges on market-rate residential real estate and construction:

Have property owners' interests altogether de-coupled from the shelter needs and mobility aspirations of those who rent due to financial necessity?

The answer – given all of the work market-rate housing's most brilliant strategists have put into trying for decades to crack the code of land-use policy's form of weaponization to thwart unwanted new residential development – may be yes, but need not be forever so.

Of course, many bygone iconic bedrock social, economic, and environmental phenomena went together hand-in-hand with the quintessential "starter home" Badger conjures. A starter home was never simply about a box, say that Bill and Al Levitt built and sold in stripped-down grandeur for $6,600 in March 1949. It was back then about an outpouring of political will, plentiful low-cost greenfield land, progressive housing financial policy such as the GI Bill, and about easy proximity to job centers clamoring for young competent workers that returning military veterans – and, most of them, married-with-young-children nuclear family households -- of World War II represented.

Now, which of those iconic bedrock notions – the political will and local zoning accommodations of tax-base expanding residential development, the wide-open access to greenfield development, the ease of access to workplaces that supported a mobile middle class living, the married-with-children household composition, etc. – remains what it was then today?

The better question – rather than "whatever happened to the starter home?" – is "whatever became of the starter household?" in its holistic sense as an economic engine of upward mobility.

Daniel Parolek, an architect who's credited with having coined the concept of missing middle housing, is quoted in Emily Badger's story, with a view that ...

We need to shift our culture away from this dependency on single-family detached housing, and thinking it’s the only solution."

A big challenge that comes with that view might crop up – among at least some listeners – with the first six words of Parolek's assertion, "we need to shift our culture..." No doubt, Daniel Parolek can look like the rest of us at the obvious conspicuous lack of housing typologies that go with the financial means, social mores, and potential economic opportunity of matching more people to shelter they have means to afford, and conclude validly that higher density, walkable, connective clusters of homes would nicely fit the bill.

What may be less obvious though concerns those who'd beg to differ with Parolek that "we need to shift our culture..."

There's no "missing middle housing" conspicuously absent from U.S. housing stock if there's no "missing middle" household – a working class, or 80% to 120% area median income household whose earners may be frontline workers – regarded as too expensive a customer base for market-rate residential developers to serve.

Konrad Putzier's analysis lays out the unvarnished stakes as would a smart Real Deal real estate reporter.

U.S. residential land alone is now estimated to be worth more than $20 trillion, according to Morris Davis, a professor of finance at Rutgers Business School who studies land values.
This historic land boom has provided a windfall for homeowners. Land now accounts for 47% of U.S. home values, estimates Mr. Davis. That is up from 38% in 2012 and less than 20% in the early 1960s. The rising value of land is responsible for almost all of the surge in home values in recent decades, he said.

Further, Putzier reports, while economists would agree with Daniel Parolek that localities hold the keys to the kingdom and they should ease zoning rules that restrict growth, constraining land supply, and adding to property inflation, the reason many of them don't are that "localities" and municipalities and communities, after all, are made of voters, voters' blocks, and elected officials. Putzier writes:

These changes are often unpopular with homeowners, who benefit from rising land values and make up around 65% of U.S. households. Adding more housing also often requires costly investments in roads and other infrastructure."

Simple ballot box math means typically that 65% wins vs. its balance, 35%, and electability means appealing, logically, to the interests of the 65%.

So, 65% of U.S. households and other landowners own $20 trillion in value, and they're going to do their darndest to see that value grow, not shrink.

The innovation, then – as Blokable's Aaron Holm eloquently and constantly notes – may not be in bending building materials and assembly costs downward, although the ability to leverage modern manufacturing in construction is essential.

The innovation, in fact, is a linkage in enlightened self-interest. It would sway current property owners who are voters by connecting them logically and dependably with a benefits and value creation stack that changes their resistance into active, engaged support.

Here are the characteristics of resistance, nesting under a broad umbrella of diminished property value as the fear that causes the greatest vibration – traffic congestion, noise, garbage, crime, infrastructure costs, higher taxes, strain on natural resources like water and trees, etc.

The innovation would offer a value-creation stack that addresses all of that, and then some.

Then a candidate running for local office might campaign on a platform promise to deliver that value-creation stack to his, her, or their local constituents.

Then, starter homes – maybe not like the ones in Levittown, but more like the ones Daniel Parolek speaks of – would crop back up. Then, the U.S., rather than "running out of land," would have a lot more land to use.

This is of course a more materially important issue to the long-term prosperity of homebuilders and developers than the ultimate cap on the Fed's funds rate and its immediate hit to the business.

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ABOUT THE AUTHOR

John McManus

John McManus

President and Founder

John McManus, founder and president of The Builder’s Daily, is an award-winning editorial, programming, and digital content strategist. TBD's purpose is a community capable of constant improvement.

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