Episode Summary

  1. Why is stick build construction a thing? Why don't we try to adopt modern production methods to our housing to help increase supply, and inject some affordability back into the market?
  2. Form follows finance and the White House is working on federal tools that can help provide additional avenues to acquiring financing for household creation.
  3. Loan applications are down 75% from last year indicating that there are less people in the market for a new home.

Failure to adopt factory production methods in construction continue to contribute to housing crises. (47 page pdf)

White House calls for increasing supply of manufactured homes to boost affordable housing in new plan. (8 min read) Additional context from Bloomberg. (4 min read)

Mortgage applications 75% lower than same time last year (4 min read)

Episode Transcript

Episode 69 - Patterns of Development

Factory, Plan, Applications.

This is patterns of development.

Hello Ladies and Gentlemen. Boys and Girls. I'm Kyle Gulau and on this show, patterns of development, we take a quick glance at data points related to real estate, architecture, and urban planning and see how this adjusts our any of our current assumptions.

Every week, as we continue to study and think about this stuff -- what patterns do we recognize? Specially in the physical space that gets developed around us. Hence the name, patterns of development.

That's my goal. Let's see how we do this week.

First up is a 47 page pdf from James Schmitz Jr. a senior research economist from the Minneapolis Federal Reserve. I stumbled across this from Alex Tabarrok at Marginal Revolution...he and Tyler Cowen are economists out of George Mason...they share a great collect of miscellaneous links and occasionally there's one that applies here to real estate. Anyway!

The paper from Schmitz highlights two key things:

  1. For the last 100 years it seems that the United States has always been in some sort of housing crisis. The Great Depression, post war-era, inflation in the 70s-80s, all the way to today and the well documented issues we're facing.
  2. Schmitz then frames the first 50 years as the construction industry failing to adopt new technology -- specifically factory production methods. The second 50 years have been, what Schmitz calls monopolies, blocking attempts to modernize the industry.

To quote the paper's thesis: "There will be no progress ending these great disparities until the residential construction industry adopts technology that other industries began adopting more than 100 years ago – factory production methods. There have been attempts to introduce these methods in residential construction for the last century, but they are always blocked and sabotaged by monopolies in the traditional construction sector, that is, the sector producing homes outside, on-site, using “stick-built” methods."

And when you put it this way it does make sense. It's kind of silly to consider how construction teams operate. They pick the project site. Then mobilize the team bring all the tools and materials onsite. Build the house and mobilize to the next site.

It's like...if you decided to get a car. But instead of going to a dealer and getting a car they came to your house and built the car in your drive way. That would be insane.

It's like if you needed to get surgery. The doctor and his team would come to your house and set up the operating room, do the operation, and then leave.

It's kind of how the world used to work with field doctors, mechanics, and technicians that came to where you were. But with the advent of the assembly line and standardized, interchangeable parts -- creating a headquarters with an assembly line and then focusing on distribution made more economic sense. It still does. So why then do we still follow this process for construction?

In fact at their peak, manufactured homes account for 60% of new single family houses in the United States. So the market was moving in a certain direction and then that production dramatically dropped.

That leads to the "monopolies" and the short answer is rules and regulations have made it very difficult to make factory built homes.

But! The White House has a plan, specifically the Housing Supply Action Plan. The plan includes 5 elements:

  • Reward jurisdictions that have reformed zoning and land-use policies
  • Deploy new financing mechanisms to build and preserve more housing where financing gaps currently exist (this would include financing for missing middle housing and manufactured homes)
  • Expand and improve existing forms of federal financing, including for affordable multifamily development and preservation.
  • Ensure that more government-owned supply of homes and other housing goes to owners who will live in them
  • finish construction in 2022 on the most new homes in any year since 2006.

Specifically related to manufactured houses we've seen this pattern time and time again. Form follows finance. If a household can't get funding for a particular type of home, that home doesn't get built. And even more common, the path of least resistance tends to get the most activity. And right now that's the 30 year mortgage federally insured mortgage and you either buy an exisiting house or you're going to build one with a banks pre-approved contractor. Not much wiggle room. Not only does this relate to manufactured homes but missing middle housing. Missing middle housing is missing for a couple of reason's and one of them is that there are less avenues to fund a deal.

Speaking of funding deals, according to the mortgage bankers association, loan applications are down 75% from last year.

So last year if 12 people applied for a loan right now, this year only 3 did. This could be a leading metric in our housing market equation. If less people are applying for financing it likely indicates that less people are considering buying or building in the upcoming months. This links back to our discussion on episode 67. New home sales slide 16.6% in April. If we're seeing new home sales decline and mortgages applications decline this could be pointing the real estate market toward a bit of a cool down.

Which leads us to our patterns of the week:

  1. Why is stick build construction a thing? Why don't we try to adopt modern production methods to our housing to help increase supply, and inject some affordability back into the market?
  2. Form follows finance and the White House is working on federal tools that can help provide additional avenues to acquiring financing for household creation.
  3. Loan applications are down 75% from last year indicating that there are less people in the market for a new home.

That's all for this week, talk to you soon.