Why the Housing Shortage Is Harder to Fix Than It Seems | Jim Righeimer

A lot of people are talking why there is not enough building and we need to build more housing. Our guest today is Jim Rickheimer, who's a developer, and he's in the middle of all of this. He's here to tell us what's really happening and why the builders may not be building enough. There are deeper reasons behind this. There's not buyers for $500,000 houses. There's a lot of buyers, but they need a house for $350,000. So the fact that, can the builder deliver a house for that cheap? And what you find is that it costs what it costs to build a house. And there's really not a lot of ways to make it cheaper. You make it smaller. You don't put a basement in it. You find less expensive things to do. But the fact of the matter is, a brand new property costs a certain amount of money to build. And the slight change in your square footages and stuff like that aren't going to dramatically make it much different. The issue is the builders will build the house, and if they can build it at a price of, say, $350,000 and they can build it for $300,000 and sell it for $350,000, they'll do it all day. The problem is when they go to build that house, it costs them $450,000 and there isn't a buyer to buy it at $500,000. I'm Siamak, and this is Market Insider. Jim, it's great to have you back on. Welcome back. I really enjoy being here. Thanks for having me. We want to talk to you about the supply. People keep talking about supply. We need to build more housing. Why are the builders not building? You have a very unique view into this. Can you tell us what's happening? Well, I think, first off, we need more housing. And if you have more supply of housing, you'll bring prices down. We all know that. It's basic economics. The problem is what kind of housing and how expensive is that housing to build to bring into the marketplace? When you look at housing, available units, you'll have stuff that was built this year, stuff that was built last year, something that was built 10 years ago, 20 years ago, and 30 years ago, 40 years ago, 50 years ago. Now, I don't know about you, but when I first got out and got a job and got my first apartment, it wasn't brand new. It was an older apartment. It cost less money. That's where I lived, okay? And those existed. They were there, right? Fast forward to now, people say, well, what we need to do is just build more housing. To build a one-bedroom apartment in Southern California with all the costs and everything else that happened there, you're $500,000 to $700,000 per unit. You can't go bring back more 20-year-old apartments. That's all we have. That's our supply that's already there. So when they say, just bring on more supply, yes, but the supply is $500,000 or $700,000 per piece. People cannot afford that. So in order for that to work, it has to be subsidized. So when they talk about affordable units or affordable housing, there's really no such thing as affordable. All there is, is subsidized and unsubsidized. Subsidized is what brings that price down. So a person can't afford a one-bedroom $700,000. The rent's gonna be five grand a month minimum to make that pencil out and work, maybe 4,500 with taxes and insurance and interest and all that. People can't afford that, or a very small percentage of people can afford that. So then some way we have the government get involved with how they're gonna go ahead and make up that gap. There is just not enough money on the planet Earth to go ahead and make up how much housing we need, especially in California, at six and seven and $800,000 per unit to go ahead and have that get fixed. That will not happen. The only thing that will shift is demand. When demand goes down, if there's less people here in California, prices will come down. But until that happens, it's just not going to. I don't wanna be political about it because that doesn't serve purpose. It doesn't move the ball forward. But the fact of the matter is you can't have 10 to 20 million people show up in a four, five-year timeframe, house them all, and wonder why there's no housing available. You mentioned Southern California. What about the rest of the country? You develop projects here. You also develop in Colorado. In Colorado, and I'm involved with a lot of people that are throughout the country, Florida, Texas, Nashville, Arizona, and then all those sub-markets that are in there. So whenever they talk about housing, yes, depending on interest rates, depending on how the economy's going in general, the market kind of goes up and down and flows. But it's definitely different in different sub-markets. So let's say you come to an Orange County or an LA or a San Francisco. When you drive out there, you don't see 100-acre farms of land available, right? It just doesn't exist. It's already sold. So when people say, there's not enough housing here, we're somehow gonna bring back housing into these metropolitan areas that are already built out, it's kind of naive. There is no units that are gonna come here that are gonna fill up this area. Yet our policymakers keep on pushing it to say, oh no, we wanna have more people here. They don't say go to the Central Valley. They don't say go to the Inland Empire where the market is at. They say force people into these numbers and they come up with these things called RINA numbers. And they tell towns that have no additional land to build on, you're required to bring this many units at Huntington Beach. You're required to bring this many units at Newport Beach, Costa Mesa, Yorba Linda, Los Angeles. You're required to bring these many more units in and there's no place to put them. When in reality, the market is saying, hey, we'll go to the Inland Empire. We'll go to the Central Valley. We'll go there. And those can be done. But again, government policymakers are saying, no, push it all to the cities. And then they wonder why we don't have enough housing. What about in other states that allow housing? So like- Well, not just allow housing, have the ability to have housing. They have room, right? So yeah. So if I'm in Texas, okay, and I'm in Austin or I'm in San Antonio, towns kind of start from a small center, right? There's a real simple reason why kind of towns all start together because water and sewer, right? Those are all pipes. They're all hooked together. You don't build a town where you start building the town here and then you go 10 miles away and start another part of the town over here. You just kind of grow off that same circle. And if you look at Google Maps is great. Go back 20 years on those maps and you can see how the towns actually kind of grew. And if there's land to grow into and there's other property, that'll keep a downward pressure on prices because you can always go another mile and find something. If you're in Orange County and you go one more mile, you're in the ocean and there's no place to build in the ocean. If you go the other direction, you're in the mountains, right? So there is no place to grow. So there's a big difference in your sub-markets whether they literally have the land to grow to build what I call your more suburban type house. Whether that's going to be the San Antonio's, that's going to be Tampa, that's going to be other places in Florida, Nashville, just all the different states that are getting growth and they have an ability to grow. You'll find in those areas, overall, the areas that have the ability to grow, they always overbuild because builders will build if you give them the money. I've told you that before, right? If a bank loans you the money, you'll build and you'll build too much. It'll put downward pressure on pricing and it puts downward pressure on rents. So you're seeing a lot of the markets that if you can see vacant land around you, rents in those areas are probably going down, have gone down. Again, it's going to be these newer, more expensive apartments that cost a lot more to build and everybody thinks there's this unlimited supply of people that can afford that $3,000 a month apartment in Phoenix, they can't. There's downward pressure on those prices. Are people building in those areas or have they stopped building? As long as the bank gives them the money, they'll build but they have to get a demand for it. So at a certain point, the banks just start saying, we're not going to do it. At a certain point, developers and builders who have to put their own money in. I mean, one of the things that's interesting, you talked about the other day was if the market's going to go down, in order for the market to go down, we need a lot of foreclosures because that's how it always was. Prices went up too high, too fast because of whatever, lower interest rates, something happened till we create a bubble and then the bubble goes ahead and bursts and the prices drop. In the case that we have here, people are buying these houses, not with big mortgages, in areas that prices have gone up, almost a bubble kind of situations. But because they've either done that or they've got a low interest rate loan, they have no reason where they have to sell. So there's not a lot of pressure to like, hey, listen, I want this much money for my house. If I can't get it, well, I'll just keep it. If you got a big mortgage payment and you can't keep it, you will drop the price until you can sell it. That's just what happens, right? In different marketplaces where they've overbuilt, you're seeing downward pressure on houses. And so across the country, the market kind of self-regulates itself. And some of the numbers that I get all the time, think about this for a second, the longest period during construction for housing track is what's called building the lot where the house sits. It's called vacant developed lots. And there's statistics on all these marketplaces. So what is the building the lot? A vacant developed lot is you put in, first of all, you get it approved by the city. You have the right to build it. It's all designed. It's all engineered that takes, you know, at least a year to get that done, probably more nowadays, but just to go find a piece of land and to lay it out and design it and the hills and the roads and the sewer systems have to drain to a certain way and the water system has to be there and the parks and the school sites, everything has to be figured in for the community to grow. That could take you a couple of years to happen. Then the construction phase of that could be six, eight, nine months, depending on if you're in an area that has weather issues. If you're in the, you know, Minnesota, they're not going to be doing moving too much, you know, frozen dirt in the winter time. They do, but not as much as you'd think that they would do. Vacant developed lots gives you an idea of what can be built in the near future. Myself, that's what I do. I build, I put the streets, the roads, the sewers, the curb and gutter, the sidewalks, and I sell those lots to home builders. I got to watch myself. I don't want to build too many of those lots because the builders say I don't need them. And then I'm stuck with, you know, 150 lots that I'm having to cut the grass on. It's not, you know, it's not a good business model. Let's just put it that way. And all the debt that you'll have to build that. So you've got to kind of interest on all of that. Exactly. You've got to calibrate yourself in such a way that you're building enough lots that builders can absorb. What the economists look at is how many vacant developed lots do you have in any given market more than we need? And I'm going to make up these numbers just to make them kind of simple. If you're selling 20 houses a month in a community, 240 houses a year, you want to kind of have it a perfect world is you have 240 lots a year being built to replace those. But if the market slows down, that you're only selling 10 houses a month now, and you got 20 lots being built. Now, all of a sudden you have double the amount of lots. And so now if the market, it'll take two years to absorb that or three years to absorb that. And that can be very painful because we're not banks. You don't want to build too much. The vacant developed lots inventory across the country is a big sign of kind of where the market's going or how things are shifting out. So again, builders aren't going to build houses they don't have buyers for or have renters for. They're not going to do that. But in order to build anything, a lot has to be there available. So that kind of has to happen first. And what does the data show you? What it shows you is it's different throughout the country, but areas that have room to build lots and they have that open space to do it, have more lots than they've had before over time, over the last five, six years, like dramatically more than they had during COVID when all the lots were sucked up. But areas that don't have it, you know, the Baltimore's, the New York's, these urbanized areas, they'll sit there and they'll say, oh, we're so underserved. We need to get more lots. Well, there's no land to get more lots. It's already been built out. It's already done. Those areas will show not enough lots, yet areas that can build lots and has less regulation will build more than maybe is needed. Now, here's the good news. That keeps prices down. I mean, it's not good for my business to have a bunch of extra lots, but I'll tell you something. If I have extra lots and I can't sell those lots or I want to do an additional project, if lots aren't being sold, all the different subcontractors, your plumbers, your electrical people, your concrete people, your dirt people, all those people are going to have to pull out their pencil and sharpen their costs and bring their costs down because there's a lot more, you know, yellow iron out there, big scrapers and equipment that's sitting idle that they want to put to work. So guess what? You may have to push your prices down. So if there's an overbuilding, that's a good thing that pushes prices down in areas that have available land to do it in. If you don't have available land, it's less so because there's just no place to go. Why are these builders not building? We are hearing that there is demand, right? There's demand at a certain price point. So a builder, let's say, I'm going to make up these numbers just to make examples of it. A builder will say for my land, for my water, for my sewer system, for my two by fours, for my windows, for all my costs, my soft costs, my engineering costs and all that, it costs me X dollars to build a lot, okay, to build a house. And let's say it's $500,000. And they're going to plug in a profit margin in that thing of, I'm going to say 50 to 100,000. If the market's really great, you know, and there's not many houses they can get more, but if it's not good, they'll get less if they get any at all. The market out there may be, there's not buyers for $500,000 houses. There's a lot of buyers, but they need a house for 350. So the fact that can the builder deliver a house for that cheap? And what you find is that it costs what it costs to build a house. And there's really not a lot of ways to make it cheaper. You make it smaller. You don't put a basement in it. You find less expensive things to do. But the fact of the matter is a brand new property costs a certain amount of money to build. And the slight change in your score footage and stuff like that aren't going to dramatically make it much different. The issue is the builders will build the house. And if they can build it at a price of say 350 and they can build it for 300 and sell it for 350, they'll do it all day. The problem is when they go to build that house, it costs them 450 and there isn't a buyer to buy it at 500. So there's a lot of demand at a certain price. At a certain price point. But when we're going above that, there's no demand. Right, because they can't and the builders can't find a cheaper way to bring that down. So there's a mismatch in a sense of what the buyers want and what the builders can build. So that'll happen for a while. So now when I'm looking for land, land always goes up in value. Well, that's not true. It doesn't always go up in value. So somebody has their property and they want to go ahead and sell it and they want so many dollars per acre and that's figured into what it costs to build a house, right? Land is a big portion of it, especially in your more urbanized areas. Land's a major portion of it. But at a certain point, if they can't sell because there's no buyers at that price, they're going to have to lower their price. Again, it's because there's just no market at a certain price. You're going to go ahead and have to lower it. Again, in your urbanized areas of Orange County and San Francisco and Dallas and places that are already densely populated, if people want to be there and there's nothing available, it still kind of keeps the price higher. But in the rest of your markets across the country, there's no reason land prices can't come down. They do. Now, in a sense, what you're saying is there's a mismatch in the markets that people can build like Austin's and other places. There's like Colorado and other ones. There's a mismatch between the buyer's buying power. Right. And the builder's ability to price. They're going to bring the price low enough to hit that number. So they are not building as much because they cannot meet that price threshold. So think about it. We had interest rates at six, seven percent, and then COVID happened and everything else, and they just brought rates down. So basically, the price of the house didn't come down, but the payments came down. Payment is different than price because you don't pay cash for a house. You actually borrow money to buy a house. Normally, most people borrow money. Their payment is what matters, not necessarily the price. So when interest rates came down, for a while, more people could afford it until the builders and the home sellers, regular person selling their house, when interest rates came down, they pushed their price up. So the price of the house went up, up, up because there weren't any houses available. Like I said, it takes a long to build lots to get everything on plan. From beginning to end, you're going to have four or five years, literally four or five years from you looking at a piece of land, getting it developed, getting it through a process, getting it entitled, digging up the dirt, building the house. You could be four or five years. It doesn't match up to where the market is at that time. So because they were only going to sell so many houses, they didn't build enough lots. So prices took off. So now it's the opposite. The prices kind of got ahead of themselves. And now with the higher interest rate, people can't afford it. Is this applicable to markets that you said don't have? Less so. So if you have, if you have California, New York and Baltimore. If you have land, you're more likely to be in a market range of what people can afford. If you have available land, if you don't have available land, your scarcity continues to push up the price and makes it harder for people. If you go driving around and you can see a farm or a piece of big pieces of property, a few miles outside of town, you're going to, you're in an area that is going to match the market better because they have the ability to do it. If you don't have the ability because you don't have the land, this is the craziest thing. Again, like I say, why do policymakers say, I mean, I'll tell you why they do it. Policymakers want people not to drive their car. Okay, so let's just get to it. They do not want you to drive your car and they're going to do everything to stop you from driving your car. So what they do is they say, no, we have to come up with these regional housing need numbers and it's calculations that all these towns have to do. And this is where you're hearing the politics, people getting upset of saying, why are you taking our older neighborhoods and putting apartments in everybody's backyard? Why are you taking their garages out and putting an apartment in? Because policymakers think more people should live here. People live in those neighborhoods are like, well, you know, maybe if I really do have a grandma and I want to have a unit for, or a kid out of college, that's fine. But if all it's really happening here is we're making single family neighborhoods into apartment neighborhoods, that's because that's what we're doing. You're going to be in a situation where policymakers want more people to live there. Yet the marketplace says, and get on the 91 freeway down here in the evening and seeing people, all the people driving into the Inland Empire because they want to be at a place where they can have a house for their family and their spouse, or maybe someone stays home. One income can do it, or one and a half incomes can do it, that kind of thing. Because of policy, we're forcing areas that don't have room for houses to have more houses along the coast and the beach areas. And yet there's other places they could go, which if government would loosen up a little bit and approve these projects, that would make a difference. These markets, if people could build in California and New York and these other markets, if their land was available, these markets is where builders could build and they would cancel out. If land was available, it would do it. And so how far do you have to get outside that marketplace or that area? What's happened real big time with people not working from home, that's really changed a lot of things as far as if you have to go back and forth to work and you have a long commute to go back and forth to work, and that's five days a week. And now all of a sudden you can do it one or two days a week. Well, then all of a sudden you don't mind maybe moving a little farther away or being in an area where you can get more house for your money because you have that unique thing in your job where you can do that. So that is actually being able to work from home, those type of things, even though they're causing a lot of disruption in the urban areas. We're right now in Irvine, California. I know of office towers all around here that have vacant floors, floor after floor after floors, vacant and beautiful, gorgeous buildings, right? Why? Because a lot of these firms have just said, you know what? You work at a computer at your desk. You easily can work at home from your desk. We need you to come in two days a week. Or I've seen law firms where the law firm will say to the associates, you know, our lease is coming up and we've got 30,000 square feet. We need to bring our costs down. So here's the deal. If you come into work three days a week, we're going to give you your own office. But if you're going to come in less than three days a week, then we're going to have offices or work areas that you can share with other people because we don't need all these offices being vacant four days a week because you only come in once. And that's a decision the employee can make. They're like, I want an office. I don't really need an office. We have conference rooms if I have to do conferences. It brings costs down and there's less people getting on the freeway, less people driving, less commuting. That's all good. That's a good thing. But it makes a big difference in housing if a person doesn't have to, can be farther away. Do you recommend for people to buy real estate right now? Or should they consider which markets and why? Listen, what I've always said, if it's long-term, it's for your own home to be somewhere and you really want to be there and you want stability. You don't want to know that you're in a house that you may have to move out of in two years or you've got your kids in school and it's gonna be over a long-term. Go ahead and make the decision to do it. But to look at what price, I mean, just look at what prices are in neighborhoods and look back three or four years ago what the prices were. And if you see 30, 40% higher price than it was three or four years ago, I'd be very suspect. I'd be like, you know what? I don't know about bubbles. I don't know about anything. That's just like a crazy number. I don't know they do it, especially if you're looking for an investment. A big thing that shot up a lot of prices of houses in different areas was Airbnb. I mean, you basically converted houses into hotel rooms. And so that house that a normal person owned as a rental, mom and pops would buy a house here and there and they would rent them out. All of a sudden that rental house is off the market. It's like one house less in the community to rent out, which is good, right? More houses you have, prices will stay down lower. But you took that out of the rental market and you put it into the hotel market because you're basically selling by the night. And the reality of it is you get more per night for three nights or 10 nights or whatever it is than you do for the whole month. Yeah. Because people want to be here. And if you're in an area like Southern California where people want to go, you know, on vacation. When it first happened, I saw it in Anaheim and people would say, oh, look at this great house in Anaheim. And I'm like, who wants to go rent a house in Anaheim? Well, if you're from here, you're just like saying, well, I mean, I'm not saying anything negative about Anaheim, but it's not like a beach town. Okay. It's not like down at the sand. It's not that. But if you're from Ohio going to Disneyland, it is. It's just a 10 mile trip to get to the beach when you want to go to the beach that day. And Disneyland is right there with the kids. Instead of going to a hotel. And if you have a large family or what we're seeing now is the family goes and grandma and grandpa go too. In fact, the reason you have grandma and grandpa go because they'll help subsidize the trip for everybody else to go. And you can all have a nice vacation with your family and you got a pool in your own backyard. But again, that house that was for rent, that's out of the for rent market now. That house is in the quote unquote, I'm going to call it a hotel business. Yeah. Different hospitality business. Correct. There's all this talk about supply needs to go up. Right. So what you're mentioning, what you're seeing is that certain markets, their supply is almost impossible for it to go up significantly because of the rules and regulation. Not the rules and regulation. There's just not a vacant land available. There's not enough land to build those kinds of housing. And then there's other markets where it seems like they're already built a lot and they got ahead of themselves. And in those markets, the affordability, what people can afford is not the new homes. So where do we go from here? If you're in an area that has available land and they overbuild, that'll put downward pressure on pricing. Okay. All things being equal, meaning the economy is okay. People have jobs. That's all working. But as far as in areas that have no available land to build, those are the areas that I'm most concerned about because there's a complete imbalance on what houses are selling for. Think about it this way. If you go into a neighborhood and you say, what do houses go for? And I'm gonna make up a number. They all go for a million dollars apiece in a certain neighborhood. But if you go over the last 10 or 20 years, there's some people that paid 200,000 for that same house. Some people paid 400,000. Some paid 600,000. Not everybody paid a million dollars. And in fact, a neighborhood will be valued by what the last two or three sales were. So think about that for a second. So the last two or three idiots came in here and paid 50% more than anybody else would pay. And all of a sudden, the houses are worth 50% more because there's no other houses available. When more houses come available- Prices will go down. And look at the generation that we have now that owns, you know, 50% of the houses are owned by the, what's the generation that's- The boomers. Like right at 50% of all housing. That's going to be transferring here soon. I mean, as people pass away, as they hand houses down, do whatever they do, you have your mom and dad pass away and there's the three bedroom house with the three kids. They don't want to live together anymore. That house is going to be sold. What you're going to find happening is that there's going to be more product coming on the market because of the age group of the people that have it that don't need those houses. When that's going to be and when that time's up with interest rates changing, I don't know. But if interest rates came down and all of a sudden, a lot more houses came on the market, it would change dramatically pricing of houses. And the other thing that you find also is that when you have people that are, and I see this a lot because in my business, I buy the farmland, quite frankly, when mom or dad pass away, the kids don't want to run the farm anymore. And they got jobs other places. They live other places in the country. They just want it sold. They're more realistic about what the real value is because they'll go put it on the market and say they want a certain price. Or like the people own a house, they'll put on the market for a certain price. But if it doesn't sell after three, four or five months because the price is too high, they'll lower the price. And it's not like if there's three people divide the money up, the price goes down. You're only taking one third of the hit of the price going down. Sounds unusual, but that's actually what happens. People will make decisions to say, hey, we grew up in this house. It was a nice house. It was fine. But it's time to sell it. It needs to get repainted and fixed up and all that kind of stuff. And we're paying the taxes on it and yada, yada, yada, whatever it is. I think that we're going to see more of a change in housing value because of the houses that are going to transfer in the next literally three to 10 years. People don't live forever. So more houses are going to come on the market. And like I said, 50% of the market is in the boomers. About 50% is owned by the boomers. Those are going to start coming on the market to make a difference and put downward pressure on prices in areas that have restrictions on growth, hard to grow. Jim Rickheimer, real estate developer and former mayor. It was great to have you. Great to be here. Market Insider. Thank you. Let us know what you think about this interview with Jim. Do you agree with the points he's making? Or are you seeing something different? We'll read all of your comments. I'm Siamak and this is Market Insider. We'll see you next time.