Eight Reasons To Be Gung Ho On Housing's Long Term Future

I spent the end of last week at ULI’s Fall Meeting. I go for three reasons: I come home with some good takeaways, it’s great to see old friends, and it’s helpful to get a sense of what the unquantifiable but all too real “mood” is.

I would characterize the mood this year as some weird combination of edgy, cautiously optimistic, and tired. The last few years would wear anyone out, and I would certainly say it was the most exhausting “boom” I have experienced.

In the same week, a friend who is starting to raise money for a residential fund asked me about selling during these confusing times. I thought I would share my response because as we talked it through, I cheered myself up.

Let’s take a moment to think about all the long-run positives for our business:

We are no longer capable of overbuilding. Municipalities simply will not let us. The entitlement process is bad for society, but it protects us from ourselves. Even Houston this cycle did not get its lot inventory to high levels. Outside of a dramatic sea change in local land use politics—while there is some tinkering here and there, I have seen nothing to turn the ship around—we cannot and will not be able to build enough. This is not necessarily true of other real estate assets. Office, industrial, hospitality, retail, etc. are not doomed to be undersupplied. Residential is. However, that is not carte blanche to charge whatever we want—while we can’t overbuild, we can overprice. But fundamentally creating too much is just not likely.
There has been no change in the desire for for-sale housing. Homeownership, like many other things, may be happening later in life, but the surveys are clear: most Americans want to own their own home, and most of them want a detached home or a townhouse with a yard.
More is more. A wise man in industrial development once said to me, “Scott, my customers wake up every morning, trying to figure out how to use less of my product. Your customers wake up every morning trying to buy more of it.” It is true. Sure, there are some move-down buyers, but most of the population would, all else equal, prefer more house, not less. I do not see this changing.
Gimme shelter. We will hopefully learn to build homes more efficiently, but there will not be a replacement for houses. We may be building like the horse and buggy days, but housing is not a horse about to be replaced by a car. People will always want and need shelter.
Value creation. In major growing metros, can you imagine homes not being worth more five years from today? I cannot. I am not sure about the answer for next year, but in the intermediate term? I have a great deal of confidence.
Emerging markets. While we can all debate the lasting influence of being able to work from home, the past few years have made more secondary markets viable locations for production housing.
Building smarter. Home building has become a more professional industry, with better management, lower leverage, and more discipline than in the past. Note I said more discipline, which may or may not be enough.
Supply and demand. Outside of affordability, and yes, that is a big caveat, there are no major imbalances in our business to overcome. There’s no overhang of lots or homes, no capital providers destroyed/left the business (yes, cost of debt is up, but that is not a tragedy), virtually no homeowners are underwater, there’s a healthy (if pricey) mortgage market, etc. Even mortgages are teed up to be a bit less at some point (all else equal) when spreads return to normal.

Anyone who says they know what the economy will do or how any given scenario will turn out for housing in the short run is delusional. While we have big challenges ahead, the long run for housing is bright. There are much worse things than being in a business with high demand and low supply.