Land

'People's Memories Are Short' - A Natural Hazard Axiom Gets A Real-Time Stress Test

What happens when abstraction crashes into homebuilding and development's real-world, morning, noon, and evening reality?

Land

'People's Memories Are Short' - A Natural Hazard Axiom Gets A Real-Time Stress Test

What happens when abstraction crashes into homebuilding and development's real-world, morning, noon, and evening reality?

June 7th, 2023
'People's Memories Are Short' - A Natural Hazard Axiom Gets A Real-Time Stress Test
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I get it. People who make their livelihoods building and developing homes and neighborhoods for others mostly disdain abstractions.

The days, morning, noon, and night, are all really hard realities. Dirt. Materials. Money. Time. Tons of talent and frontline skills. Deft navigation of local officials, inspectors, neighbors. Rinse, repeat.

All hard, real-world, real-time realities. Far from theoretical. The opposite of abstractions.

But what happens when abstraction crashes into homebuilding and development's real-world, morning, noon, and evening reality?

  • Decisions by two major insurers to stop offering new homeowner's policies in California highlight the growing portion of America that's becoming close to uninsurable. - Axios
  • Arizona sets limits on construction around Phoenix as groundwater dwindles - New York Times
  • In the past five years, more than one in four Millennials has moved as a result of concern over their home’s exposure to weather-related events, according to a recent Freddie Mac survey. – Freddie Mac

These are not ideas or theories or what-ifs. They're events.

Climate change is happening, and there’s a tremendous amount of unknown risk around the country,” said Jeremy Porter, a co-author of the study in Nature Climate Change and head of climate implications research at the nonprofit First Street Foundation. “These things are going to come to a head.” – Washington Post

Or rather, not "going to come to a head," but they have come to a head.

Now, the question for business leaders in the residential real estate, construction, development, design, and distribution space is this: Are these matters, rooted as they are to the issues as basic as the dirt, and the money someone will pay for it, and the value of the structure on it, and the residual value of that property, abstract? Or are they deadly real, next-twelve-months' financial, and economic actualities?

And if they are that – not abstractions, not ideas, not somebody's political agenda – real forces that impose themselves into the value proposition, the financial soundness, and the trust equations that tie sellers and buyers and resellers, etc, then how should this community's leaders be readying, and positioning, and committing, and investing resources?

A full year before Arizona state officials took action to restrict homebuilding in the Phoenix area due to a lack of groundwater, our own contributor Scott Cox listed the reasons why, and noted it was only a matter of when, not if, those restrictions would go into effect. He wrote in The Builder's Daily, April 28, 2022:

  1. A combination of long-term weather cycles and climate change (we don’t need to argue about the mix) is reducing – and making more volatile – moisture in the West, whether in the form of rain or snow.
  2. The Colorado River is the critical source in the West that fueled much of our development. In the 1920s, when it was allocated amongst Upper Basin (Utah, Wyoming, Colorado and New Mexico) and Lower Basin (California, Nevada, Arizona) states, allocations were based on some above-average moisture years. Fact is, it simply does not produce as much as originally assumed.
  3. Regulating groundwater use has been difficult to initiate even when aquifer levels are clearly falling, as it is for the most part not based on seniority but on ownership of the land. Phoenix is a good example of a comprehensive areawide plan. However, trying to institute such a plan in the Antelope Valley in California resulted in years of litigation.
  4. Depending on the state, Agriculture uses 80-to-85% of the water, with urban use taking the balance. Residential uses, on average, 1.5-acre feet per acre per year (3 DU/acre). Agriculture, on average, uses 4.5-acre feet per acre per year.
  5. Erratic rain and snow fall means we need more storage to capture large runoffs for lean years. But, for a variety of reasons, we rarely build dams anymore (there is some recharge of aquifers for storage) or even off-stream storage.

These events, these realities, these non-abstractions matter all the more now. Why? Because if what's been taking place in new-home sales since late November of 2022 reflects a homebuyer demand somewhat undeterred by high interest rates and relatively elevated price levels, affordability constraints will remain as a governor on growth.

  • If mortgage rate levels stay elevated as expected, a percentage of would-be homebuyers remains priced-out.
  • If homeowners insurance rates skyrocket or it becomes difficult to secure coverage, more lower-end homebuyers would trip on monthly cost threshholds.
  • If developers can't prove evidence of 100-year water supplies that would support new development, it also impacts affordably-priced new homes.
  • If younger generations of adult households – i.e. Millennials and Generation Z – become more discriminating about where they choose to live and buy, then home values in markets with natural hazard risk stand to undergo price disruptions.

Each one of these factors impacts the wherewithal of a share of the would-be new homebuyer universe.

Now, whether or not the "little-recession-that-couldn't" ever does come along, and whether or not the landing is soft or hard, and whether or not it impacts macro employment rates, the issue homebuilding and residential real estate development leaders face as they look at the next near- and mid-term period is that affordability and climate are not abstractions. Far from it.

If you don’t think you’ve been affected by global warming, take a closer look at your last homeowners’ insurance bill: The average cost of coverage has reached $1,900 a year nationwide, but it’s $4,000 a year in New Orleans and about $5,000 a year in Miami, according to Policygenius, an online insurance marketplace. And that is pocket change compared with the impact climate change may ultimately have on the value of your home."  New York Times

They're as real as the ground, and the water under it, and the air above it, and the money people can and will pay for it.

What could be more real, less abstract? What are the real business leadership issues here that homebuilding, residential real estate, development, and investment agenda-setters can and should address. Especially, since the new-home market's performing better than expected, and may well be building a case for recovery.

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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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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