How Green is Your Valley?

Homebuilders and homebuyers are odds. The political and “moral” push to design and construct “green” homes has now forced homebuilders in many communities to throw their collective hands in the air and say, “Damn the economics, full steam ahead.” For many, this will require substantial changes in how they design, build, and market these environmentally friendly homes to a skeptical and often disinterested homebuyer. For others it may put them out of business (HERE). 

Most buyers want what I’ve been saying for years: They want the biggest home, on the biggest lot, they can afford—period. I realize this is open for significant debate, but most housing growth is still in the suburbs and will be for the short and long term. It is the detached single family home that the buyer wants. And if it’s a choice between an extra bedroom, or a photovoltaic roof top electrical system – the building industry is finding that the bedroom wins.

For the last few weeks there has been an interesting series in Builder Online on the acceptance and costs of building green homes. They found that in some instance the costs of building green can add more than $150,000 to the cost of a home. These costs are for solar thermal and PV systems, more efficient equipment, tighter homes, and insulation. Some of these systems and building standards are even mandated under many state laws.

Most new homebuyers are interested in the following in order of important:

• Location (city, neighborhood, schools, culture, etc.)
• House Cost
• Debt Cost
• Maintenance Cost
• Affordability – the blending of the three
• Design and Layout
• Environment

Yes, like it or not, in my opinion, the last and least important is environment (HERE). Buyers will say they value these elements of a house: Energy Star ratings for appliances, windows, and certifications as important to their decision, but most buyers expect the home they buy will be energy efficient (insulation, windows, water heater, etc.), the heating and cooling the state of the art, and appliances will not waste energy (i.e. dollars). They do not expect to pay for these as extras.

We are heading for a time when new homes will essentially be cost free for electricity. Solar PV systems (with battery type storage systems) will become ubiquitous like modern HVAC systems, and as the two become better integrated, homes will essential become zero electricity users. Cost of heating will drop with better design and insulation (and cheaper natural gas). The issue is always how much will the buyer pay to reach these levels – they do not see these as trade offs.

What is more critical is the quality of the construction itself – not the whistles and bells. Better insulation and moisture control reduces everything from nail pop in drywall to cracks in drywall and moldings. These are actually more for the builder themselves than the buyer – call-backs and repairs are very costly.

One of the problems at the moment is the velocity of new home sales is still slow. This is due to many factors from student debt, costs of down payments, and very high cost of new homes. If the demand were higher many new products would literally hit the street. Competition and markets would bring these new products to the industry.

We will see substantial changes to the “green” side of the housing industry, they may not be flashy but they will save the homebuyer money in the long term. But one thing is for sure, the basic home will be more expensive.

Stay Tuned . . . . . . . .

The End of Housing As We Knew It!

We are in the midst of a significant change in how we build our housing in the United States. Eighty-three years ago, and for fifteen years after that, almost no significant numbers of homes and apartments were built. There was a depression and a war, don’t you know? And those few homes built were done one or two at a time; the idea of large scale production housing wouldn’t seriously begin until the late 1940s and continue on through the rest of the twentieth century. Names like Bill Levitt, Eli Broad, and Phillip Kluztnick come to mind. They took Henry Ford’s idea of a production line and began to build housing the same way. Housing counts increased, prices (relatively) dropped; demand for housing during those fifteen years after the end of the WWII far exceeded the ability to supply. Housing prices climbed in concert with the growth of the economy and incomes.

From this the era came the big builders: Kaufman & Broad (Detroit, 1957), Pulte Homes (Bloomfield Hills, Michigan, 1950), Lennar (Miami, 1950s), Standard Pacific Homes (Irvine, 1960s), and currently the largest by homes sold, D.R. Horton (Fort Worth, 1978). Each morphed from a start-up small builder to the huge conglomerate with some now building apartments and even commercial and office space. They have extended their developments across America and into Europe.

In an article in the Wall Street Journal this week (ClickHere) headlines the all-important part capital plays in the building industry, who can get it, who can’t, and the result. The big boys in home building who can access the private capital markets are “gobbling” up the small entrepreneurial builders. Many of these small builders are grateful after hanging on by their nails through the past six years for the chance to either finally get out or have the financial backing to realize their dreams with partners like Toll Brothers. Some are lucky to even be alive.

The 10 largest publicly traded home builders have increased their share, since 2007, of the new home market by 6 percentage points to 30 percent. And I can only see this trend growing. The larger projects with hundreds of homes and hundreds of acres cost serious money, money most of the smaller home builders can’t access. Or the institutions are asking that a larger amount of capital be put in the deal, money the small builder needs to build the houses. The long term capital for the land is one thing, the contractors and subs putting up the houses want to be paid now – not later. The big boys can do this and in fact have developed their own construction teams using very different employment practices than the mom and pop shop.

What concerns me is this growing concentration of a fundamental part of the American economy in the hands of a few. Housing and its support through everything from appliances to furniture is a massive chunk of what makes this economy roll along. Look what happened when the housing bubble exploded – it nearly took down the world’s economy. And that was when there was a 24 percent concentration (and it was these same guys that over-built and over-sold, trapping families with future foreclosures). It was the quarterlies and stockholders that drove much of this overbuilding. No one said, “Hold on, is this right?” I know I was there.

And it was the politics. When the feds wanted a broader housing market that would eventually include many who shouldn’t own a home, it was the big builders they went to. They were more than glad to show their “political support” for the idea – with Freddie and Fannie guaranteeing the loans (i.e. us). And it was only these guys who could get the government to “refund some taxes paid during the boom years to offset losses during the housing crash. That policy, signed into law in 2008, gained the large public builders a combined $7.8 billion.” Wish I could have done that!

This concentration is as troubling as any concentration is in any industry. Things will begin to disappear like competition for buyers, higher quality construction, and diversity in design. Much will tend to get dumbed down and lost. And with the government involved through the growing influence of the federal guarantee programs (it now controls 70% of the mortgage market) and the purchasing of home loans, we will all be losers at some point. I am reminded of that every time I see pictures of Pruitt-Igoe and Cabrini Green housing projects. All well intentioned government housing programs doomed to failure from the first day. Big is not necessarily better and giant is worse. The marketplace demands accountability and this can only be achieved through competition – which is now being lost. When Henry Ford said that you can have any color as long as it’s black – he controlled the automobile market. After WWII, less than thirty years later, Ford hovered in bankruptcy; arrogance is a tough market to satisfy.

It’s my belief that we are headed toward a dark place in housing. Governmental demands and controls through energy (solar and lighting efficiency), materials (recyclable demands), densities (wrong type in wrong place), hookups (costly access to sewer and water), and price (loan guarantees and tax changes), will significantly add to the cost and the decline of the product’s quality. The single family house is on every environmentalist and bureaucrat’s hit list, the American dream is threatened. We will be the poorer for it.

Stay Tuned . . . . .

What Really Matters?

First and foremost: GO GIANTS

The state of California is in a terrible state. According to the last count only three people in the whole state completely understand the new budget, one is the Governor and he is having a difficult time explaining it to his constituents, the other two live alone and nobody knows who they are. For the past thirty years school initiatives passed as well as those for fast trains, highway expansions and save the universe bonds. Californians have grown weary of the state’s perpetual begging and badgering and no longer believe the politicians, teachers unions, environmentalists, and the news. This may be an electorate who says no to everything this year. “Governor, go pound sand.”

More than once I have pointed to the incredible number of associations, departments, commissions, and agencies that seem to proliferate at the state level. No department is immune. Many are at cross purposes, all cost money. And the streets still fall apart, kids can’t read, and more and more people are out of work.

This is not the blog to find answers; if I knew the answers I would bottle it and sell it on street corners (with a license of course, I’ve applied but still waiting). Besides no one listens anymore – it’s all shouting and finger-pointing, then when they lose, they go away and sulk. But they will return, bet on it.

Let’s just look at one example, the California Environmental Quality Act (CEQA for short). Forty years ago its goal was simple; analyze a proposed project so that all the major issues are set before a city council or county supervisors for a more educated approval or denial. If has morphed into a huge industry that fundamentally says to most developers “No way, no how.” Due to the volume of paperwork generated for even the smallest project, no one reads the reports, no one understands them, and what is more important, nothing gets done due to the potential for lawsuits. Even now litigation is built into the planning process. Not on the document itself but on “how” the document was produced, and its scope, and its facts. CEQA on CEQA.

Huge developments and projects (from residential to industrial) take years to evolve and get built, many go through economic shifts (like the last four years), they never turn out as they are planned. These projects become instantly out of sync with the approved Environmental Impact Report (EIR). Thus, is there any value in the document itself? What is its purpose then? Is it worth the costs? I can assure you that every nickel spent on an EIR is passed on to the consumer through higher and higher pricing.

It’s all about consultants and experts, in fact a whole industry - with little or no culpability - has grown serving these interests. To my point, just have the governor announce that CEQA should be thrown out and a newer and more streamlined process will instituted that quickly looks at a project and then allows it to move forward. Stand back, the screams from state agencies (water quality, traffic, etc.), Sierra Club and other environmental groups, as well as NIMBYs, NONONOs, and other special interests will cause deafness. The system is broken and BandAids won’t do the job.

The legal world just loves CEQA and EIRs. This process and these documents become so convoluted that only $500 an hour attorneys understand them, just get six in a room and listen to their opinions – none will agree. It is supposed to be a factual document, based on real science and real calculations, phooey. Much is opinion and speculation based on extrapolations the greatest computers couldn’t calculate. And if it is a “pet” project, they try circumvent the process, such as the High Speed Rail’s attempt to avoid CEQA and “speed” things up. Welcome to our side of the street.

It is now a process that is fundamentally structured to hobble or squash concepts and projects. Whether a new town, affordable housing, gas extraction, high speed rail, highways, and even solar projects – go figure. The defenders say that the courts have continually been fair and just when reviewing these claims. Now that is the problem in and of itself - if the process were fair and just, these documents should not have to be decided in court. Years of lost time and money are wasted in the courts.

A new process must be developed to assess projects. Do I believe that this can happen? No. Do I think that the various special interests will give up their assumed importance? No. Do I believe that the state will find a way to make allow things to happen again? No. Do I believe we are a long way from building and growing ourselves out of our problems? Yes.

Why do you think in this state “shovel ready projects” didn’t happen? The EIR wasn’t and it still isn’t finished.

Stay Tuned . . . . .