Tuesday, May 18, 2021

Zero to One

by RAPHAEL BARTA Contributing Writer
| April 28, 2021 1:00 AM

We are in an age of technological achievement, with a Rover crawling around on Mars, self-driving vehicles here on Earth, Crispr gene-splicing in medicine, and ever more impressive advances in all sorts of technology. My personal focus is housing, and one thing I am perplexed about is how can it be that a country with our vast resources and technological know-how, skilled labor and readily available capital, can be facing this massive housing inventory shortage, with the direct result of skyrocketing prices and millions of Americans unable to buy a home. New home building has not kept pace with population growth: we are apparently 4 million units short of where we should be.

This inventory shortage did not happen overnight: it is the cumulative result of various forces, some of which have their genesis in the aftermath of the 2008 housing crisis, and some are more recent pressures. The inventory crisis is local, regional, and national, and it includes both new-build homes and existing homes. It is also very democratic, affecting all price spectrums of the market and rental housing too.

One of the factors driving the new home building market is the price and the scarcity of lumber. Wood products are one of the more critical components in the home building process: upheavals in that supply chain ripple through immediately. So how is it that the cost of the lumber for the average home has escalated $25,000 in one year? The trees used for lumber kept growing since the Great Housing Meltdown of 2008. They are growing still, just waiting to be harvested. The sawmills are there too, all the processing equipment ready for the saw logs. There’s no shortage of the raw material or the mills that can turn logs into lumber. I haven’t heard of a shortage of logging trucks or loggers, or trains that carry the finished dimensioned wood to the Home Depot lots. The companies that supply lumber to the US are no dummies—they can see the strong demand, so why not run the sawmills 24/7 to catch up? If you can sell everything that you can produce, why not do that? It has gotten to the point that home builders will not give a fixed price now for a new home until all the lumber required to complete that home has been delivered to the property.

It’s not just lumber affecting the price and availability of new housing. Other items that are on backorder: electrical panels, appliances (hot water tanks/washers/dryers etc.) certain plumbing connections, and the list goes on. Is this the effect of supply chain interruption because the pandemic shut down factories? Are the multi-national sources for inputs still reliable, where the chain has been broken and traditional suppliers are no longer in business? Global manufacturing systems often route various components through low-cost labor countries (SE Asia in particular) and this entire order has been upset as source-at-home trends are beginning to take hold.

Those issues are “hardware issues”: the physical stuff utilized in the building process. There are “software issues” that are equally important, such as zoning entitlements (i.e. how many housing units can fit on a particular piece of land, and permit/ impact fees (in Sandpoint almost $20,000 per unit to the city for parks/new fire stations, etc.) Skilled reliable construction labor is scarce too with so many workers having left the business after the 2008 collapse. Those workers were in their mid 20s then and now if they even thought about returning to construction it’s a much tougher grind when you’re in your 40s. And in those intervening years, more young people chose other occupations to go into.

The situation of limited supply has been exacerbated by a surge in demand. Prior to the pandemic, North Idaho was attracting a steady trickle of retirees and escapees from large urban centers in the US West. People who thought how nice it would be to live in the postcard atmosphere of Bonner County. But the Covid nightmare, the work from home ethic, and the civic unrest from the chaotic politics of the 2020 election year blew the doors off: what was “nice” now became “necessary”: everyone was looking for that small-town sense of safety and lifestyle, not just retirees. If there are twelve cities on the West Coast with at least 6 million people, and if only Point One Percent (.001) of them are looking to relocate, that’s 72,000 people, way more than enough to overrun our limited property base here. This is a once in a generation population migration shift, from the concentrated urban centers to a diaspora dispersal throughout small towns (usually resort towns) in the West. We are only beginning to see the changes that will be forthcoming as new people with new ideas and new culture begin to form part of our community.

A question I am asked all the time now: will prices cool off? A little, but only from exhaustion as buyers are going to quit chasing values ever upward because it is so frustrating. There are many factors that contributed to the present situation though, and the whole thing could come crashing down if some black swan event occurred. A black swan is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences. Black swan events are characterized by their extreme rarity, severe impact, and the widespread insistence they were obvious in hindsight.

The entire housing industry is in dire need of a revolution: from zoning and location criteria, building codes and specifications, the way a home is built and the materials that go into it, and including the way it is sold. It’s all so 1950s. As the saying goes, “never waste a good crisis” – this ought to be a time where some significant changes are made to this dinosaur industry. When a process builds on what is already there, that goes from 1 to n. Small steps, iterative improvements to be sure, but the overall approach doesn’t change. True breakthroughs occur when there is a quantum jump, from zero to one.

Raphael Barta is a broker with a practice in residential, commercial/investment, and vacant land. raphaelb@sandpoint.com “Zero To One” is Peter Thiel’s excellent 2014 book about revolutionary change and other interesting topics.