One of market rate ground-up residential development and construction’s riddles right now speaks to an atypical market “instability that increases risk levels.”

Scott Cox, a Dream Team advisor of The Builder’s Daily, who contributes here often, bullets out the sources of instability and the character of risk bedeviling asset portfolio management, new investments, and baseline resource allocation planning at least for the near- and mid-term future. Here’s Scott’s bullet points (a sneak snippet of a presentation he’ll give this week in Toronto):

  • Long-term undersupply plants the seeds of price volatility.
  • Long processing times create temporary oversupplies within the overall undersupply.
  • Volatile pricing and slow demand response function creates “bad math.”
  • Erratic project delivery times complicate managing overhead efficiently.

The crux of the riddle is the line “temporary oversupplies within the overall undersupply.”

Scott shines a lens on protracted investment-entitlement-planning-permitting-developing-construction-inspection-and-delivery processes that mess with predictably timed and priced delivery of completed homes. Add to those abnormally drawn out – and growing more so – value stream delays with materials supply chain snags, skilled labor chokepoints, climate-related disruptions, etc., and the “bad math” of supply calculations starts to come clear.

The paradoxical riddle – undersupply and overbuilding – has moving-target market-rate for-sale new-construction demand disruptors many market appraisers neglect as well.

(1) A sudden inflection among professional employees

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Source: Census.gov

SlowBoring, an analysis and commentary site hosted by Matthew Yglesias, looks at a range of implications specific to housing demand, of a nation of slow to negatively-growing places:

In a scenario of population decline, though, the market value of a house falls below the replacement value of the structures. You can see this by looking at statistics, but it’s pretty easy to eyeball where it’s taking place because the signature is a neighborhood with more vacant lots or vacant buildings than ongoing construction projects. Huge swathes of Detroit are, infamously, like this. But it’s also true of Cleveland and St. Louis and Milwaukee and Baltimore and other cities. Abandoned or vacant buildings are a source of blight — negative amenity value to the neighborhood.” – SlowBoring.com

Just as housing supply capacity is susceptible to an array of “moving-target” forces that undermine business planning and investment in a broad, long-haul, chronic context of undersupply, demand – particularly among ground-up market-rate homebuyers and renters – can run through distortions and disruptions as well.

In such a tricky, volatile, and complex environment, recognizing and navigating the differences between housing need and housing demand are critical. The first is a function of population and headship rates. The second has present and future wherewithal built into it. The future of work, the future of wealth transfer, and the future of population growth in a place can all impact wherewithal.

Solving the riddle will mean being ready for the “bad math” tricky demand estimates can create, as well as its impact on supply modeling and deliveries.