Episode Summary

  1. The development equation: money + people + permission = development. If any variable is 0 the project doesn't happen. And if any number has an increasingly high minimum value, it doesn't happen.
  2. The median household costs in the United States continue to rise, illustrating the supply-side issue our communities have.
  3. Restrictive zoning has had a historically outsized impact on shaping our built space impacting neighborhood affordability, segregating communities, and contributing to sprawl.

Interest rates will rise until inflation is under control (paywall possible, 4 min read)

Median household price tops $400k for the first time in the United States (paywall possible, 3 min read)

Cancel culture comes for zoning (6-minute read)

Episode Transcript

Hey everyone. I’m Kyle Gulau. On this show, patterns of development, we take less than 10 minutes each week to deconstruct what's going on in real estate, architecture, and urban planning.

If we were to think about real estate as an equation I believe it's money + people + permission = development.

Money. People. Permission. Those are the ingredients. The people who make those ingredients are banks, developers, and cities.

Bank = money.
Developer = people.
City/Municipality = permission.

So when we wonder what's the biggest, most impactful thing that's happening in the world of real estate and urban planning, I'm looking at it through the lens of that equation.

This week it's the money part of the equation seeing the biggest change.

In congressional hearings today Federal Reserve chairman Jerome Powell said, "We're looking for compelling evidence that inflation is coming down, and we don't have that." when asked about predicting future interest rates.

My favorite analogy about interest rates is comparing them to gravity. High interest = heavy gravity. Low interest = 0 gravity.

As interest rates rise, that gravity increases. Why increase gravity? To decrease economic activity. Which leads to fears of but tames inflation.

What does this have to do with real estate?

Higher interest rates equal a higher cost of business for developers. The biggest line item for developers is their debt service. How much do I pay the bank each month to make this project happen? For households, higher interest rates likely mean an increase in their biggest expense line item. However, most people who have bought a home are likely locked in historically low-interest rates so this new, heavier, gravity will affect households that have yet to be created.

This will likely have a negative impact on the supply of housing. If it's more expensive to buy and build, people will be less likely to buy keeping the inventory levels at near all-time lows.

Interestingly enough, home sales are declining according to the National Association of Realtors down about 3% from last month. However. However, the homes that are selling, for the first time, broke the median existing-home price record. That new number? $407,600.The median price of a home in the United States is steadily creeping toward a half-million dollars.

How did get here? It's a long story. Again, let's pull up our equation:

money + people + permission = development.

We talked about money. If people can't get the money, they're probably out. What about permission? What's that?

A big part of the permission portion of the equation is zoning. The rules of what you can build where. An article by M. Nolan Gray, published in the Atlantic discusses why we should cancel zoning. If you've ever taken on a project yourself, you know that zoning can become a complicated, cumbersome, gnarly part to any project.

To quote the article by Mr. Gray, "Why did zoning get so restrictive? Until recently, zoning constituted a relatively minor check on overall housing construction. Through World War II, many American zoning codes remained flexible by modern standards, even though they were often designed to be exclusionary. Land-use categories remained broad, density restrictions were largely limited to height and lot coverage, and most developments occurred without much fuss.

This has unraveled over the past 50 years, as cities and suburbs across the country have aggressively expanded use segregation, tightened density rules, and imposed months of additional public review.

What changed? The most compelling theory holds that a mixture of rapid inflation and generous federal-tax policy encouraged homeowners to treat their house as an investment, providing a strong incentive to oppose new construction."

This culture that's manifested itself typically appears in the public arena as the, not in my back yard attitude or abbreviated as "NIMBY."

And that takes us to our patterns of the week:

  1. The development equation: money + people + permission = development. If any variable is 0 the project doesn't happen. And if any number has an increasingly high minimum value, it doesn't happen.
  2. The median household costs in the United States continue to rise, illustrating the supply-side issue our communities have.
  3. Restrictive zoning has had a historically outsized impact on shaping our built space impacting neighborhood affordability, segregating communities, and contributing to sprawl.

That's all for this week. Talk to you next week.