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AmextaFinance > Small Business > How Real Estate Professionals Can Help Address The Housing Shortage
Small Business

How Real Estate Professionals Can Help Address The Housing Shortage

News Room
Last updated: 2023/11/07 at 9:13 AM
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Cody Bjugan is a veteran land developer, entrepreneur and investor. Mentor of leading land acquisition coaching program, Vestright.

Contents
The Root Of The CrisisAn Interest Rate ConundrumThe Bigger PictureLooking Ahead

The U.S. is no stranger to economic challenges, but one crisis has been looming large in recent years: the housing shortage.

Often referred to as the “housing crisis,” this phenomenon represents a growing concern, both in the minds of the American public and the larger macrocosm of interconnected market economies. A pertinent example of this shortage first evinced itself in the multifamily real estate sector in 2022. The Wall Street Journal reported that investments in apartment buildings plummeted a staggering 74% as of May 2023 when compared to data from the same quarter a year prior.

What does this mean for the future? Some say the first ripples of this shortage could appear as early as 2025, which means there could be even more scarcity of available properties in less than two years from now.

The Root Of The Crisis

It’s important to recognize that this shortage isn’t a sudden occurrence; it’s the result of years of imbalances in the market. One critical factor is the lack of available land for builders. While there’s ample land in the U.S., much of it remains off-market, and developed land is scarce. As a result, the challenge lies in identifying these plots, negotiating with property owners and navigating the labyrinth of governmental approval processes to transform this undeveloped acreage into potential housing projects.

An Interest Rate Conundrum

Following the current market’s trajectory to its natural conclusion, it appears obvious that these changes have been significantly influenced by the Federal Reserve’s policies, especially concerning interest rate increases.

The Fed’s decision to raise interest rates, primarily as a means to curb inflation levels, has had unintended consequences. About halfway through 2022, the housing market reached what many saw as a peak, and later that year, the market appeared to be “poised for a correction,” according to Bankrate. But, values started increasing again. As a result, a significant number of potential buyers are on the sidelines, waiting for a clearer picture of the market.

And this hesitation isn’t baseless.

Humans, by nature, are adaptive creatures. Just as the global community adapted to the Covid-19 pandemic, donning masks as a fourth essential item (alongside keys, wallets and cell phones), potential buyers are waiting to adapt to the evolving market conditions. With fluctuating interest rates, many are hesitant to commit because they’re unsure of where the dust will settle.

While, historically, interest rates of 6% to 7% might have been considered acceptable, I believe the modern buyer has become accustomed to a choice selection of rates in the ballpark of 3%. However, these historically low rates simply aren’t sustainable. An inevitable rise in interest rates will force potential buyers and investors to adjust their expectations, both in terms of the rate they’re willing to accept and the type of property they can afford.

The Bigger Picture

The housing crisis isn’t just about land and interest rates. It’s intertwined with broader economic concerns and societal challenges. Business Insider reported that even though roughly two-thirds of U.S. households are owner-occupied, the country is still short between 1.5 to 6 million homes.

But, I believe we’ve seen this scar before, nearly a decade ago. The Great Recession left lasting scars on the housing and construction sectors. It resulted in significant job loss and forced many professionals to shift to other industries. Without question, this added a burden to the already strained sectors of our national economy, thereby making it that much more challenging to meet the rising demand for housing.

Moreover, bureaucratic red tape further complicates matters. In my experience, the average project entitlement process for raw land development stretches over 18 months, which is an exasperatingly long time that further exacerbates the supply-demand imbalance.

Additionally, while many jurisdictions vocally advocate for affordable housing, their actions tell a decidedly different story. Rising permit fees and other associated costs can make the dream of affordable housing increasingly elusive.

Looking Ahead

Overall, as we approach 2024, the housing crisis is expected to become even more pronounced. The culmination of rising interest rates, land scarcity, bureaucratic challenges and the aftermath of the Great Recession will expose the shortage in stark terms.

However, amid the challenges, there is a beacon of hope. Many are working to address the shortage, bringing off-market deals to the forefront and striving to expedite governmental processes. But as the crisis deepens, a more deliberate collective effort may yet be required.

From my perspective, there are steps professionals in the real estate industry can take to find sustainable solutions, including coming together with their communities and the government. Bureaucratic red tape often delays the initiation and completion of housing projects, thus exacerbating the shortage. Therefore, land developers and other leaders in real estate can try working closely with local and state governments and advocate for reforms that make approval processes more efficient without compromising on essential safety and environmental checks.

The next step is to seek partnerships with other leaders in the real estate sector—from builders and architects to financiers and urban planners. Creating a consortium of professionals dedicated to addressing the housing crisis can allow leaders to leverage collective expertise to innovate and implement sustainable solutions. This could involve exploring alternative building materials, adopting innovative construction techniques or integrating affordable housing models into mainstream projects.

In other words, through a comprehensive and collaborative approach, professionals in the real estate space can help address the housing shortage in America.

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News Room November 7, 2023 November 7, 2023
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