Proof that Prices Won’t Fall?

BOSTON – Emerson Claus has been building houses for 45 years. But he has never faced delays like he is now trying to get basic building materials. “I had a client ask me to add a door,” he says at a job site outside Boston. “We just waited six months to get it.”

“That’s a door in a frame,” Claus says, exasperated. “That’s kind of crazy.” He says appliances can be even worse. “A dishwasher, if you can find the model you want right now, you might wait a year for it.”

By one estimate, the U.S. is more than 3 million homes short of the demand from would-be homebuyers. Pandemic-related supply chain problems aren’t helping. They’re adding tens of thousands of dollars in cost to the typical house. But the roots of the problem go back much further – to the housing bubble collapse in 2008.

“What I call a bloodbath happened,” says Claus. It was the worst housing market crash since the Great Depression. Many homebuilders went out of business. Claus was building houses in Florida when the bottom fell out.

“A lot of my tradespeople found other work, went and got retrained for new jobs in law enforcement, all sorts of jobs,” says Claus. “So the workforce was somewhat decimated.”

A few years later, as Americans started buying more homes again, building stayed below normal. And that slump in building continued for more than a decade. Meanwhile, the largest generation, the millennials, started to settle down and buy houses.

And that’s the main reason we’ve ended up millions of homes short – builders for many years just weren’t building enough to keep up with demand. That lack of supply has pushed home prices to record levels – up nearly 20% last year alone.

Gradually, though, many homebuilding companies recovered. Claus is now the president of the Home Builders and Remodelers Association of Massachusetts. Before COVID hit, he had a crew of nine full-time workers again. That’s not counting the many subcontractor electrician, roofing and plumbing companies he works on homes with.

“We always need guys,” says Rene Landeverde, Claus’ foreman. He’s originally from El Salvador, and for the past 10 years he has helped Claus and other local builders find a lot of other workers to hire and train. “I’ve been bringing guys to companies, like maybe 200 guys in my whole construction experience.”

But then the pandemic hit. Things shut down and some of those workers left. Now, with unemployment so low, Landeverde can’t find people to hire like he used to.

“It’s a lot harder,” he says. “They’ve been finding other work.”

Claus says that’s made it more difficult for builders to respond to the surge in demand for homes during the pandemic.

“If I had twice as many guys, I would still not have enough,” says Claus, who now has five employees. “And my subcontractors, they’re all hurting for people.”

There’s another very big roadblock to home construction.

“Land,” says Claus. “I was just trying to buy a piece of land to build five homes on it. Unfortunately, that land went to somebody else that may put one or two on it.”

Claus says he wants to build more attached townhouses, or smaller homes on less land. That’s what many first-time homebuyers can afford to buy. But in many places, zoning rules won’t let you buy land and divide it up – you can only build one house with a big yard.

Zoning challenges

Overly restrictive zoning is a big problem nationally, says Robert Dietz, the chief economist with the National Association of Home Builders. “In certain neighborhoods you simply cannot build townhouses.”

“You have to build single family units on lots that are bigger than the market wants,” Dietz says. “This is not a free market choice. It’s a government-imposed rule.”

He says that in many parts of the country, the classic NIMBY (not in my back yard) opposition stops higher-density units from being built. Existing homeowners who don’t want more traffic and more homes in their neighborhood keep what he says are outdated, exclusionary zoning rules in place.

So to make a profit, builders like Claus are left doing renovations or tear downs – buying an older home, knocking it down, and building a bigger, more expensive new one.

“We are seeing a lot of knockdowns,” Claus says. “But it doesn’t add to the housing stock. You’re replacing something, you’re not adding to it, so the net effect isn’t the best.”

Changes in zoning can make a big difference. Some states and towns have been changing the rules to allow in-law rental apartments to be built onto existing houses. These are called accessory dwelling units, or ADUs.

“Twenty percent of remodelers indicate in the last year they’ve undertaken an ADU project, and the typical one can cost anywhere between $100,000 and $200,000,” Dietz says. That’s good for the supply of rental housing, which is also very tight. But Dietz says we also need a lot more homes for people to buy.

“That could be a townhouse,” he says. “It could be a single-family detached home on a small lot that’s roughly 1,800 to 2,100 square feet, that’s appropriate for effectively a newly married couple that’s moving out of their first apartment and is getting into their first rung of homeownership.”

Right now, Claus says that because of the restrictive zoning rules, he doesn’t have any new home projects lined up that will put a house like that in a place there wasn’t a home already.

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