Markets, Zoning, Developers and My Prediction
Am I wrong? I don't think so.
Good morning, folks!
It's October in Minnesota. Yesterday, it was almost 80. Now, the weatherman is saying it might snow on Halloween.
ooookaaaaay?
I was listening to a conversation between Scott Galloway and Ed Ellison yesterday. Galloway is a serial entrepreneur and business professor at NYU. Ellison is his impossibly young and smart podcast co-host. I mean, the kid is twenty-five or something, and he’s got more neurons firing than any person should. Galloway worries that young folks like Ed are just giving up on housing ownership, and they no longer see it as a possibility. “It's kind of the American dream. I think it's really too bad. I think it's a supply problem.” Galloway argues that market dynamics alone won’t solve the housing shortage; substantial government intervention is necessary to bring the housing supply up to par with demand. In particular, he’s concerned that piecemeal solutions and low-interest-rate policies aren’t enough. Instead, he calls for subsidies and credits and urges an approach that could enable the private sector to build more efficiently while potentially easing the affordability crunch.
Exactly!
Any developer will tell you that we’re short nearly six million homes, and even when interest rates were low, we still were not producing homes/condos/townhomes fast enough to shift people into that part of the American dream. You’ll often hear folks who are already owners pointing back to historical interest rates that were considerably higher, but Ellison points out that unlike today’s housing crisis, where scarcity and competition drive prices up, the 1980s were about the high cost of borrowing.
Sure, maybe you were paying 15%, but there wasn’t a line of people standing behind you waving their checkbooks (and all contingencies) that were happy to pay 100k over asking.
Add to that fact that those historically low interest rates people locked into two years ago have shortened up supply EVEN MORE because, let’s face it, that 3% re-fi that so many people took advantage of locked them into their homes. Why buy your way into a higher interest rate for a potentially SMALLER house? I have friends who can’t afford to move one block over.
Golden handcuffs 🙂
What does all of this point to?
I think Galloway is right.
We are going to need some kind of government intervention across the US.
And by intervention I mean more small towns and cities doing away with restrictive zoning as we did here in Minneapolis.
Want to build a triplex? Go for it. Want to build that 12-unit? There are fewer hoops to jump through in my zip code than across the river in Saint Paul.
Now, of course, I don’t have a crystal ball here, but I do have some common sense and I’ve been in enough rooms lately where this is a perpetual conversation.
I do think that city councils are slowly but surely going to change zoning requirements. For one thing, there’s revenue generated through taxes. If a new developer can take two lots that previously held two 1500 square foot houses, home to, say, 6.5 people, and put up a forty-unit building that houses 80 people. Well, you do the math. The tax revenue on that condo development is exponentially higher. We’re talking different universes here.
I also think that many of those who planned to hold onto their mortgage rates and age in their homes will have second thoughts. That 4000 sq. ft. Tudor that Barb and Tom bought in 1985? It’s not ADU compliant, and hiking up three flights of stairs on tired knees or cleaning out the gutters on a three-story house seems less and less appealing the older you get. And really, they’re not in love with the house.
They’re in love with the neighborhood.
They like the coffee shops and restaurants and tree-lined streets. The problem is they can’t downsize in that neighborhood because the restrictive zoning they loved at 40 has come back to bite them in the ass at 65.
I’m not mad at Barb and Tom. They’re good people :-)
But eventually, I think they’ll vote to undo some of the problems they’ve helped to create, even if this progress is motivated by self-interest.
Now, where do you and I fit into all of this?
I can tell you what I’m doing.
What I’ve ALWAYS been doing: Looking for development opportunities.
And you should, too.
I’ve talked with a few aspiring developers this week who aren’t seeing this moment for what it is.
If you were reading this newsletter last year, I told you that the market had undeniably cooled. Even though it might seem otherwise, that should create some URGENCY for you.
Why?
Because what you have right now is time to learn AND expand access to people.
That architect that you admire? She’ll probably take your call right now. That general contractor? He’ll have coffee with you. When things are slow, smart people are still building; they’re just building connections. They’re collecting talent. And resources. Information. Know-how.
And you should, too.
When things heat up again, it is very, very hard to get a phone call returned. It’s not that you don't have cool ideas; it’s just that you’re an unknown.
I’m teaching a class this year on development. If you’re just here for the development insights and stories, that’s cool. Stick around. I’m not going to be talking about this class all year :-) But if you want to learn how to be a developer and would like 1-1 guidance as you explore this career?
Study with me.
Also, for all of you developer nerds, I was going over some of the newsletters I’ve written over the past year and realized there was something I wanted to circle back to: Existing Conditions Surveys.
It’s also a funny story, so stay tuned for Friday’s newsletter.
Sign up for my class. I’d love to walk your build site with you one day. Questions about the class? Shoot me an email.
Peace,
You probably found me through Twitter, but if not, make sure you’re following me on social media.
X: seandsweeney