Getting Smart on New Home Construction with NAHB’s Robert Dietz

Mike Simonson here. Thanks for joining me today. Welcome to The Top of Mind podcast. For three years now, we've been sharing our latest market data every week in our weekly Altos Research video series with the Top of Mind podcast, we like to add context to the discussion about what's happening in the market from leaders in the industry. Every week, of course, Altos research tracks every home for sale in the country, all the pricing, all the supply and demand, all the changes in that data. And we make it available to you before you see it in the traditional channels. People desperately need to know what's going on in the housing market right now, and, and market was, you know, frozen so solid last year, and then the landscape changed dramatically. All of a sudden, mortgage rates are climbing again this year. So what happens next? If you need to communicate about this market to your clients, your buyers and sellers, go to altos research.com.

(01:12)
Book a free consult with our team. we can review your local market and how you use market data in your business. So, alright, let's get to the show today. I've got a great guest today, Robert Deets. Robert is the Chief Economist and Senior Vice President for Economics and Housing Policy at the National Association of Home Builders. His areas of expertise include the housing market, of course, economic forecasting and the policy research, including the benefits of own ownership and federal tax policies, often cited in on housing and economic issues, and all the big media sources. We're gonna talk about new construction today, home builders but also some policy and some forecasting things. All the things that we like to, to dive into and geek out about here on the top of Mind podcast. So Robert, welcome.

It's great to be here.

Great. So so thanks for joining us. So let's start with just a little bit of background. Your background and your work at N A H B and, and you know, how you, how you, how you got here.

Yeah, actually, I, I became a housing economist when I was a, a sophomore in college. My, my economics advisor was a, was a housing guy and basically said, you're gonna, you're become a ho an economist and then work on housing issues. And I got a PhD in economics at Ohio State in 2003. went and worked on Capitol Hill for about two or three years, did a lot of policy work on, on taxes and real estate and small business issues. And then I joined N H B in 2005 at the very peak of the building boom back prior to the, the Great Recession. and then I've, I've been at N H B ever since, and the last eight years or so I've been chief economist and lead a team of about 12 doing housing research forecasting and, and policy work.

Great. Well, I am super interested in hearing some of that forecasting and the policy implications. We've got some real interesting policy challenges in front of us in this, in the country. but, but let's start with the let's start with the, the, the, the year, the, the housing market year. It's been a year of surprising housing market trends, right? We started the year, you know, in frozen mode and then all of a sudden things turned around. Surprisingly we had more demand than supply that, you know, the home builders specifically have had maybe the most surprising turnaround this year. So tell me what, what we know now, your perspective on what we know now and about what's happening, especially with, with new construction. tell, tell me what we know now.

Yeah, 2022 was, was a challenging year to be sure. I mean, going from an environment where we had 3% mortgage rates in the first quarter to, if you remember last fall, 7% or higher. But the, the, the fundamental characteristic of the housing market, and this has been true for years, has been a lack of inventory. so on the resale side, you, you've got roughly about three months supply. we need four and a half to five months to have a balanced market. And when you don't have enough resale inventory, and that's gonna be continued to be challenged by the fact that homeowners sitting on a two or a 3% mortgage are unlikely to put their home in the market, new construction has to be part of their, their home search. Now certainly there's been pricing out for the market and that will continue, but as we begin to settle in and head into 2024, home building is preparing to increase its levels of production to add that inventory.

(04:59)
And the, the number that really kinda sticks out to me is if you look at inventory levels right now in the market, a full third of homes available for sale are new construction. Historically, it's only been about 12%. So that that new construction share has grown. And of course the industry still faces the challenges that got us into this mess, which was effectively a decade of under building the industry faces a skilled labor shortage. There are policy issues like zoning and, and cost issues with land development. But ultimately what we think is gonna happen in 24 and 2025 is a gradual increase in single family construction that's gonna get us to a level of inventory that we reduce the housing deficit that exists in the market today.

So, so then you're saying that, that the, the rate of new construction for home builders is finally getting back to a, a more normal pace?

We'll, we'll get there. We're, we're not there yet. Actually briefly got there during the Covid home building boom, if you think about single family construction starts getting up above 1.1 million roughly for about an 18 month period. That's the level of production we need to be at to reduce the housing deficit. It's, it's roughly about eight to 900,000 single family homes built a year for household formations and population growth. And then another two to 300,000 for second homes replacement homes for homes that are destroyed or otherwise retired from the stock. So we, we'll get there probably by the time we get to 2025. The, the challenge for the industry is a focus on the supply side though, making sure we have the construction workers to enable that level of output, making sure there's enough lots into the system and that the issue that's really front of mind right now is access to capital.

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Cuz I think when a lot of people think about the home building market, they typically think about the big national home builders. Those national home builders represent about a third of overall production and they get access to Wall Street capital. But for the two thirds of construction that's undertaken by smaller private and regional builders, they go and get a loan from a bank. And so when the prime rate increases as the Federal Reserve Titan's monetary policy, the interest rates on construction loans, land development loans goes up and that acts as a check on housing supply. So navigating that particular headwind is gonna be absolutely key

In the show. Yeah, and I think I saw you, you at N H B did some writing about this recently where like the banking crisis is actually maybe exacerbating that this year. How scary is that?

Well, so we were definitely nervous when you began to see one or two bank failures. And you know, the big question was, were people going to take their banking deposits, particularly the uninsured banking deposits above that F D I C 250,000 amount and move from the small regional banks up to the too big to fail banks? because 85% of lending to builders, to land developers comes from those smaller regional banks. So if their deposit base shrank, we would've seen a decline in the amount of loans available for home builders. Fortunately, some of the policy actions taken some of the, the market corrections, we only saw about a 5% decline in that loanable funds basis. So it's an, it's an impact, but I think the, the bigger impact is just what the overall housing market's been suffering from, which is the overall increase in interest rates.

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And I'll give you a number, it should be shocking to, to realtors and anyone else in the industry. The average effective annualized interest rate on a construction loan right now is above 12%. So think about, you know, your six or 7% mortgage interest rate for a builder, it's about a 12 or 13% interest rate on an annualized basis to go out and get the financing to build the loan or the house before they actually sell. Yeah. That's where the tightenings in play. So we get these little moments where housing demand peaks up, we just went through one, it's gonna cool now as long-term interest rates go up again. But the challenge for builders is they know it takes about two months to get permanent approval. It takes eight months to build the home. It takes two years to develop the lot. And so getting the financing available to meet the demand in the future is quite a challenge.

Yeah. And, and so that, and that doesn't look like it's backing off anytime soon that cost, right? Like those are ticking up as, as, as at least as of right now. That's right.

Yeah. And that's one of the reasons if you look at new home prices, they're up 30 to 40% since covid began.

Right, right, exactly. Part of that is that, is is that financing cost in there?

That's right. That's right. And building materials, of course, we, we all remember what happened to lumber and in 2020 and 2020.

Yeah. And, and I'd love to talk to you, you mentioned labor. I'm, I'm interested in that and like the immigration implications of labor. But do you, while we're on the topic of, of interest rates, do you forecast rates in your organization and what do you, what should we think about mortgage rates and, and, and financing rates for the, for the coming year?

We're still hanging onto our forecast that peak mortgage interest rates at least on a sustained basis, occurred in the fall of 2022. Now, currently we are, we're in an upswing you know, Freddie Mac said last week, mortgage interest rates average about 6.8%. They will go closer to 7% in in the next week's data, given what we've seen with the, the 10 year treasury rate. But what we think is this will be the final upswing, basically, as the bond market capitulates to the idea that we've got one or two more rate hikes from the Federal Reserve. The Fed is then going to stay higher for longer. They're not going to ease until 2024, but we think by the middle of next year, we'll be looking at an environment where economic growth will have softened enough that inflation will be on a, you know, kind of a, a real kind of reliable course down to the federal reserve's target.

(11:02)
And that will ultimately bring down mortgage interest rates just below 6%. So we're talking the second half of 2024 going into 2025. The, the, the big factor in trying to forecast interest rates, particularly mortgage rates right now, is the spread between the 30 year fixed rate mortgage and the 10 year treasury rate. That's typically because of the operation of Fannie and Freddie 160 to 180 basis points. Right now it's 300 basis points. So we, we went to normal conditions in terms of the impact of the secondary market, we would actually see interest rates fall back by about a hundred basis points. So that's kind of a Trump card in our pocket in terms of where we think we're going. So expect ongoing tight conditions. I don't think we should say that 7% is the new normal. Some buyers can still operate the environment, but 6% from a builder perspective does look like a rate at which business can be done, and we think we'll get there on a sustained basis sometime by the middle of next year.

That's that sounds about as optimistic as you could get for the rate and economy environment, like, sounds like a soft landing. Sounds like is that, do you feel generally optimistic about your outlook?

Well, we actually feel like this is one of those outcomes that's going to happen regardless of whether we have a soft landing or hard landing. If we, if we have a soft landing, it means the Fed can ease sooner than we expect, right? That they can say, okay, you know what? Now core P C E inflation is headed down to its 2% target. It's, it's at 4% now. So it's, it's made a lot of progress. Future progress is gonna come from shelter inflation reductions. Shelter inflation reductions are gonna come about because rent growth, and we already see this in the data, rent growth is slowing. So that component from the housing markets there, plus we have about a million apartments under construction, and as that supply hits the market rent growth will slow. But if we're wrong and we look at a, a more harder kind of landing where economic growth goes down, when economic growth declines and you get recession risk, the tenure treasury rate moves lower as well.

(13:15)
So we, we think by the time we get to the middle of next year, we'll either have mission accomplished from the Federal Reserve, or they will have overshot their target, and in which case, long-term interest rates will come down. Now, you know, people always ask, okay, you know, what would we look for to say, okay, your forecast is wrong. You know, policy mistake, a big expansion in government spending could certainly have an impact, right? Any, anytime you see the deficit go up, that's gonna be inflationary. You could have a black swan event. So th these are, these are not a hundred percent certainties. and certainly in the post covid environment, I think when you do forecasting, there's a certain amount of humility you have to bring to the task. But we feel pretty comfortable with the idea of thinking about the second half of 2024.

(14:02)
In the beginning of 2025, we'll be looking at mortgage rates in that kind of 6% range. And, you know, the big builders in particular have found that if they can buy down rates below 6%, there are a lot of home buyers who are willing to get back into the market. And that's because of demographics. As those millennials, the leading edge is age 43 right now, as those millennials move into their, their early forties, the demand for single family homes is gonna grow and grow and grow. And as we said earlier, there's just not the existing inventory in the market. So builders are gonna have to fill that gap, and they're gonna be able to do that a little more successfully in certain market tiers and certain geographies. but we do expect production to increase. And 2025 through 2030 looks like a pretty good runway for home building growth. 2030s are gonna be more challenging, but that housing deficit means the next five years as we normalize the market should be pretty promising for home builders across the country.

Yeah. And, and we can obviously see that this year with the buy downs that the rate by downs by the builders like builders have had been having a, like a remarkably good year considering all the things and, and how different it is from where it was. So that evidence, I think, is really strong. you mentioned in, in there about the million apartments under construction and that we're, we're kind of getting there on single family home construction, but, but a million apartments. you know, I spend, you know, we publish all a lot of our data on Twitter and a lot of, you know, the social media and there's a big group of folks who are really afraid of too much construction. Do we have too much coming to market or record levels of, you know, construction? how should I think about that million apartments coming online? Is it I, is there downside in there? Is there, is there something to any worry about, or is it you look at it as a as positive?

It's, it's, it's nuanced, right? So I think dividing the market between single family, single family is, is at least on the construction side, is about 90% for sale. Multi-family construction is 95% built for rent. So they, they are distinct markets. On the multi-family side, we are expecting production declines because that million apartments under construction is the highest total since the fall of 1973. Now, part of that is because the construction process is taking longer. Today, it takes about 14 months to complete construction of an apartment building. You know, a few years ago it was only 12 months. So the, it's in the pipeline for two months longer. That's, that's adding to some of that construction total. But without a doubt, we do face an issue of oversupplying some market. And then you combine that with tightening financial conditions for multifamily apartment developers. We're gonna see a slowdown in multifamily starts.

(17:02)
If, if anything, we've been surprised during the first part of 2023 by the strength in multifamily construction. And when we look at the geography of it, it's a lot of suburban apartment construction. It's the impact of that shifting out of the geography of housing demand post covid with hybrid work models. So yes, we do risk over supply in some parts of the apartment market. Then if you took the look at the single family side of the market, I think there, there's an unambiguous deficit. Construction remains limited. It's governed by the lack of lots, the, the availability of skilled construction workers zoning issues and the like. And that's the reason you've got such a tight existing home market is we simply have underbuilt the market. So there's a lot of debate. You, you referred to social media, there's a lot of great housing analysts in the industry, and there's some debate about the size of the overall housing deficit.

(18:00)
Freddie Mac, I think has got an estimate that suggests that we're short about 4 million homes. The realtors have done research saying 5 million, or depending on some, some toggle parameters could be as high as 8 million. Ivy Zelman has said, you know, depending on the demographics, you know, we could be a balance or even some limited surplus. My team has put out an estimate by looking at vacancy data. We think the estimate of the deficit is about 1 million homes. So we're a little bit smaller, and we think that's evenly split between single family and multifamily. So our single family estimate is actually less than a million homes. But keep in mind the, the production scale here, we're building about eight to 900,000 single family homes a year. So a 750,000 deficit is still actually quite sizable. So again, it goes back to the idea of if we get above 1.1 million, that's above the speed limit necessary to, to bring that deficit down, it's gonna take about five years to do it.

(18:58)
So we need five years of relatively calm macro environment. We think that's coming. once the Federal Reserve ends its task on, on, on the inflation challenge, which was created by too much stimulus during covid and then builders can line up and get some certainty and be able to build single family. The challenge is building the right kind of single family homes. We need more smaller homes, higher density, townhouse construction, that's difficult to build. It's easier to build the, the larger home, the more expensive home. The buyer demand is more certain, it's easier to zone, it's easier to get the lots for that kind of market. So that's gonna be the challenge, is building the right kinds of homes in the right places. But what we've challenged communities and local officials is get the right kind of policy in place. You will add housing stock, and then that's a great pitch to businesses to come locate in your market because your workers will have affordable housing. And a good example of that is Columbus, Ohio, which has got 10,000 jobs being created by an Intel production manufacturing facility coming. And the reason for that is that Columbus, Ohio has an affordable housing market where builders can add supply when needed. And that's, that's the kind of market I think individual communities need to replicate.

Yeah. So lot's in there and, and I, I always love to ask my guests, like, which of the markets doing well? And so I like to hear that Columbus is, is interesting on that, on that front. That's, that's really notable for me. the building the right kind of home, like we need entry level homes, we need smaller homes, we and yet the economics are showing that that's hard to do, right? So it's like, as you pointed out, right? so what are the chances that we do it? And, and if we can't do it, what happens to the market? Like if we can't, if we continue to under build entry level homes, what happens? What's, what's the outcome?

Yeah, the, the expectation is that the affordability challenges that we've faced for the last few years will worsen for that entry level type market. the, the irony here is that for the last 20 years, we've heard about the, the silver tsunami or some of these issues of the baby boomers are all gonna hit age 65 and sell their homes all at once, and the market is gonna be deluged with inventory. But actually the, the challenge is, is actually the opposite. It's, it's lacking that kind of entry level type home. So I, I do think we're gonna see some success in things like townhouse construction. Townhouses are a great kind of entry level type product. You can build a large number of them on a given amount of land. right now, townhouses make up about 20% of single family starts. I think that share will go up to, to 25%. But in the communities that zone for that kind of housing, some kind of communities will not do medium density, light touch, density type zoning. So that, that, that remains a challenge. but, you know, overall, I, I think that the market will g gradually increase in efficiency not everywhere but enough to provide some additional inventory for those, those millennials to, to attain home ownership.

Okay. So that, so the townhouse as a opportunity feels like there, like there's at least a, a good trend there. and probably some communities that are aware of that as an opportunity, even though we, like, we don't really have solutions for our entry level affordability problem o on the horizon. Is that a good summary?

Yeah, I, I think the, the solutions aren't in place. I think what's different than say 10 years ago is you've definitely got more policymakers talking the talk, right? Okay. Right. I, if you think back to 20 14, 20 15, this was the beginning of when we began to warn that we had moved from a market that was oversupplied the years right after the great recession, when there was undoubtedly in inventory glut, and we were moving into an environment where we were under building. And, and, and me and my team, we were, we refer to this as the challenges of the five Ls. So we've, we've already talked about them, right? Lack of labor, lots, lending, lumber, legal and regulatory hurdles, these factors that are holding back supply. And so, you know, policymakers I think have now understood, and Covid was this sort of natural experiment where economic activity shifted into the housing market, that we had a housing deficit, we don't have enough homes.

(23:41)
So one is acceptance of the problem that there is a housing crisis, we don't have enough inventory and housing affordability conditions are gonna be challenged. In fact, we expect some declines in the home ownership rate this year as a result of some of the pricing out that occurred in, in 2022. But then where the rubber meets the road, are they going to implement policies that would allow us to add that additional affordable inventory? And we, we've talked a lot on the for sale single family side, but this applies to the for rent multi-family side as well. So those policies, and, and there's no single simple scalable solution like we have to enact improvements in all these areas. So it, it means resources and funds into workforce development in the construction sector for remodelers, apartment builders, single family builders. It means zoning reform that allows you to build the missing middle townhouses, small multi-family entry-level homes on small lots.

(24:40)
It means getting a new softwood lumber agreement with Canada, we have a 9% tariff on Canadian lumber, and a third of our lumber comes from our friends up north. And so the lumber market, which if we all remember in 2020 and 21 shot up was adding $50,000 to the typical price of a home because of those higher lumber prices, we face those same risks today. There's not been an increase in domestic lumber production, and we still have the tariffs. So if single family construction goes up as we think it will in 24 and 25, lumber prices are gonna go back up again. And then the, the big ru long run challenge is just land development in, in general. And in fact, that's one that can have a lagged effect because higher interest rates for land development loans today mean fewer lots two years from now.

(25:29)
So as we move into an expansionary period, a recovery period, 24, 25, a lot of markets are not gonna have enough lots. And so you'll see volatility in lot and land prices. This is the lags and leads that occur when you move from the Federal reserve's policy through the home building sector and the housing sector. So you know, state, local governments, federal governments, the Federal Reserve itself, there's all roles to play. And as I said, there's no simple single solution we can point to. We're gonna have to make improvements on all these fronts. The good news is we've got lots of folks talking about them. I would like to see housing and home ownership a 2024 presidential election issue. and if the homeownership rate is declining for the big block of voters and the millennials, it likely will be.

That's yeah, for sure. It's a, there there is a, it's a top of mind issue for a lot of young people around the country who it's like, it seems to be forever unaffordable is a really interesting challenge you mentioned. So I wasn't really like I'm not a lumber guy, but I, but the 9% tariff is a really fascinating mix that, that adds a ton to cost. And we're talking about like, how can we lower costs? That's a really fascinating one. I'm also, I'm a, I'm a free market labor, like a free pro-immigration person. tell me what should I know about immigration? Yep. and like, are we getting better? Is it like, are we still screwed <laugh>? What, what, what should we know about immigration, how it impacts builders as well as as demand side?

Yeah. Immigration is kind of an interesting one because it does affect the demand side of the market as well as the supply side. So for example, in the building industry, about a quarter of the industry's workforce, and we're talking the entire workforce, including sales and marketing, other kind of business services. But about a quarter of the industry's workforce are non-native born Americans. They're, they're immigrants into the sector. So providing certainty there is important. Now, I will say where the industry has failed is, is less getting immigrants into construction and really, frankly, getting high school graduates and community college graduates, trade school graduates into residential construction, that the task there is to recruit, train, and retain workers in the residential building sector. And there are a lot of organizations, including most prominently, the Home Builders Institute that are trying to recruit those workers. I, I think some immigration reform would certainly help on the demand side, of course you know, if, if it wasn't for immigration, if you look at the, the population data of the United States, the US population would have been declining for the last 10 years, if not for immigration.

(28:14)
The, the birth rate in the United States in terms of the fertility rate has fallen below that kind of breakeven level of 2.05 births per woman. So when you see that decline in the birth rate and some weakening in immigration, it does mean that the, the population growth rates fallen in half. And this is why there is some debate over how big the housing deficit is right now. But I think immigration reform can be part of it. But here's the key issue. In residential construction, we also have to increase productivity of builders and remodelers, and there's a lot of different ways to do that. Increasing training but could also mean changing the ways that we build homes. So right now, about 3% of single family homes are what we call modular or panelized construction. They're effectively built in a factory. Now, this is different than manufactured housing or mobile homes.

(29:07)
these are homes that look like traditional site-built homes, built on a foundation, a home ownership product, but it's only 3%. Here's the thing, in the last few years, lots of discussion about 3D printing and other kinds of technologies. If you look at the data, that 3% number of pales compared to the 8% share that was factory built back in the late nineties. So the share is actually gone down where the conversation has increased. And so what we expect is technology coming into the sector that's gonna result in some productivity gains. Again, it's not gonna be easy, it's not gonna be quick, but some productivity gains that will help us deal with that skilled labor shortage. So I think this is another great example where some immigration reform would certainly help provide certainty to employers in individual markets where immigration is a big source of construction labor.

(29:58)
If you think about like Florida and Texas, it's more than half of the industry. But also then technology. And then the big thing is telling the story of housing as a career, getting high school graduates, community college graduates into the housing sector. And again, that could be as a realtor, as a banker, but as a construction worker as well. And you know, the, the, the big topic of conversation in the last few months has been AI and how AI is gonna change the labor force. AI has been mostly hype in the last 20 years, but it is gonna have an impact on jobs. It's, we're gonna have fewer office jobs, which means the jobs that are gonna be more in demand in a relative sense, the chef, the nurse, and the construction workers. So that's something where N A H B or state and local associations and, and, and, and labor development organizations and big players in the sector, we need to be contacting high schools and community colleges to get people into the housing industry.

So you look at AI as essentially a, a sort of a boom to, to the construction industry, to those jobs in the construction industry. Does it, does it make them more valuable? Does it, like, does their, do their wages go up?

We, we, we think the overall labor market is, is due for a reset. You know, I, and I, you know, I recognize as somebody that went to college for 10 years, and I'm, I'm married to an economist as well, she went to college for 12 years. We're not probably the greatest voice to kind of get kind of lay this out. But if you think about how the labor force is gonna change more ai, which again, is gonna reduce that demand for office workers, and I think we're gonna see a rise in training designations from big companies. So rather than getting a four year degree, which can be expensive and cost, you know, $200,000 with lots of student loans, which has been a, an issue in the, in the housing market as well, you could go get a training designation, which will act like a, a bachelor's degree from Google or from an Amazon in terms of coding or some other things that then opens the door for other sectors, including construction, to offer their own kinds of training designations.

(32:07)
And that's why a partnership with community colleges, trade schools is really gonna be key because there's lots of different trading designations that will train tomorrow's carpenters and plumbers and electricians. And if you spend five, seven years as a, you know, kind of a skilled tradesperson, that is then the, the liftoff point to become your own subcontractor or your own plumbing company or remodeling company. And from that, then you launch small business. So one of the things I really, as a free market guy working in the home building sector and the housing industry, is we get to study the traditional entry points into the American dream home ownership and small business ownership. We're the defenders of them or the promoters of them because we are the great originators of those, those kind of outcomes that we wanna see. So, you know, getting the, the training resources there, taking advantages of the technological changes that we think are coming. And this isn't great news for the colleges, but I do think it is good news for the skilled middle sector part of the labor market.

That's that's a really interesting take and, and surprisingly optimistic, I'd say. Like, it feels very bullish on, on where we have like, room to grow in the future. it does feel you know,

Economists, yeah, economists by their nature tend to be short run pessimists and long run optimist <laugh>. That's,

So that's what you're saying. Exactly. I'm, I'm with you on that. I, I, I get it. and we, we have a lot of, we have a lot of productivity to grow. And in fact, that brings up another question I had. So you mentioned that, that we're down to 3% of the homes that are being built now are, have, have the, like a factory component, and it was 8% in the nineties that I had no idea about that. Like, I'm paying attention to the conversation and the, the venture money. But w w so what was being built? What were the components that were being built in the nineties that was working then that we're not using now?

Yeah, the, the, the difference is that it's, it's partly the shift in geography. There's been a lot of changes where homes are built. Today more than half of single family home building is built in the south. In fact, if you look at the top markets, three of the top five single family home building markets are in Texas. Three of the top 10 are in Florida. So it shifted away from the northeast and from the California markets. And a lot of the, the, the modular and panelized construction, the factory built housing was really concentrated in parts of the East coast where there were traditional factory centers of production, think like Pittsburgh, you know, Pennsylvania type markets North Carolina with furniture, that's where you had modular construction. So as home building has shifted out into newer markets, the, the, the travel cost, the transportation cost goes up and that reduces the market share, and that's what's going on.

(35:07)
So as you start to see venture capital money going into these new technologies, not only is it a new production process, but it's a new geography thinking about accessing the Texas markets accessing maybe some of the, the California markets that previously haven't benefited from this. So we do think that that share is likely to go up in the five to 10% range. But to go back to something I said earlier, there's no simple single scalable solution. modular construction's not gonna work in every single market. it, it is gonna require workforce development to provide the housing we need.

That's, that's really fascinating to think about the location of the factories and how much that matters. well, you talked about being long-term optimist, so let's talk about longer term future, like rest of the decade. you know, we've had, we have now we're in the millennial peak earning and home buying years, and that's been driving a lot of our demand as especially through the pandemic. and it is also evidence, I think of this year, the surprising resiliency of the housing market this year is, is millennials going, well, it's mortgage rates, it's six and a half, I'm buying at six and a half. but that trend ends, you know, trails off and in a few years and we've been kind of hostile to immigration. So that trend cools down. And and so what does the second half of the decade look like to you? For housing?

We're definitely gonna see an increase in single family production. So e estimates saying that we'll get up to 1.3 million single family homes a year, 1.4 million. Those are exaggerated. We, we simply do not have enough construction workers in the training pipeline to get there. But getting to 1.1 or 1.2 million single family homes built a year, I think is attainable. It is what we're expecting between 2025 and 2030, that's a period of time. Of that 750,000 single family home deficit, we think will come down into the 200 or 100,000 range. So we'll build out, and then we'll get to kind of equilibrium levels of production. This is where the demographics do begin to claw back home building production. But during that same time period, we're gonna see a growing growth of remodeling. if you look at the data, for example, 20 years ago, remodeling was about 30% of residential construction.

(37:44)
Today it is more than 40% of overall residential construction activity and headed to 50. And the reason for that is the aging housing stock. The typical age of an owner-occupied home in the United States right now is about age 40. And it's been growing quickly because of the lack of new construction in the market. So we're gonna see a change in the kinds of home building activity undertaken as we get to the end of this decade. More remodeling, more tear down construction. The tear down construction share right now is about 9% of single family starts. Just a few years ago it was only 6%. So we think that number's gonna quickly grow to 12 or 15%, and that's basically replacing an older home homes that are aged 80, 90 years old and replacing it with a more energy efficient, more resilient home typically in an existing neighborhood.

(38:36)
So you get some of that density benefit as well. So there's gonna be a lot of roles to play within the residential construction industry, remodelers, single family builders, the big ones, the small ones, and apartment developers. But there will be some of these shifts of activity. And then, you know, we, we talked about long run optimism. There are certainly some big headwinds as we head into the 2030s. That's when the demographics begin to move against us. We know generation Z and then Gen Alpha beyond them is smaller generational groups. So there will be a demographic headwind turning into a tailwind and, and pushing against us. and then we'll have some policy issues. social security and Medicare mean higher interest rates and higher tax rates likely in the 2030s, and that's gonna make the environment for buying a home more challenging. So I, I think if you're trying to balance your, your interests and think about business planning over the next decade, it's navigate the way through the end of the Fed tightening cycle, 2025 through 2030, look pretty promising, and then be more cautious as we enter into the 2030s.

That's a a incredibly clear view of the, the, the next 10 or 15 years. I really appreciate that. I ask all my guests what they think about the next decade or so, and that's, that's among the, the most precise. So I really appreciate those insights. One last question on that. We talked, you talked about construction volumes in those times. What do you think about pricing, if we get to a world where we are more balanced in our construction, do prices come down or do they, does price growth moderate? What, what do we think of, what should we think about home prices over the next decade?

Yeah, price growth is probably gonna moderate, but an expectation that you're gonna see big drops in new construction pricing is, is unrealistic because of the fact that if you look at material costs coming outta Covid, they have gone up in aggregate 35 to 40% land and lot pricing has gone up as well. And then we are gonna have some lingering effects of higher financing costs, which work their way into the system. So I, I think what we're, we're likely looking at is where demographics combined with a catch up in nominal wages and a decline in interest rates are gonna offset some of the supply side increases in costs. What that all suggests though is that the expectation of a period of overbuilding or oversupply is likely is, is, is unlikely as we move into the, the market in the next five years, because there's just simply not the workers and materials necessary to build those homes.

Ah, that's a, that is a great, great solid, well-founded view. Robert, I know you've gotta run, so we'll wrap it up here. Where can our guests, our listeners, find you and read your stuff? I know we're, we're Twitter friends, where should, where, where do you like to point 'em?

Yeah, so if you are interested in following the economics of the home building industry, I recommend that people check out i on housing.org. It's e y e on housing.org. That's nh B'S economics blog. It's our primary production pipeline for, for all the research that we do. And, you know, even if you're not in building or remodeling or apartment development it's a great place to look at economic data, particularly the supply side of the housing market. That's really what we focus on and it's what we wish the Federal Reserve would focus on is they think about the future of, of fed rate hikes here at what we hope is the end of the tightening cycle.

All right, everybody, that's the top of mind podcast for the week. Thank you all for being with us and we'll be back again next week with another great guest. Thanks everybody