PolicyCast: “It’s Supply, Stupid”

Kirk Willison, Arch MI’s Vice President for Government and Industry Relations

If we’re going to solve our home affordability crisis, we need more homes, millions of them. And to get there, we need a vibrant home building industry. So, I’m delighted to be joined on the PolicyCast today by Jim Tobin, the Chief Executive Officer of the National Association of Homebuilders. Jim took over as CEO this past June after many years as its chief lobbyist; he leads an organization of 140,000 members in oversees a staff of 200. He and his association have to navigate tricky waters, including high interest rates, land use restrictions, and growing regulatory cost to meet consumer demand for more homes. Let’s see how he plans to do that. Well, Jim, thank you very much for agreeing to join me today on the Arch Mortgage Insurance PolicyCast.

Jim Tobin:

Yeah, it’s great to be with you, Kirk. It’s, it’s really, it’s really fun. I’m looking forward to it.

Willison:

Well, you know, in one sense, this might be considered the heyday. For homebuilding, you can’t read an article anymore without seeing the dire need for additional housing stock. And you guys are making progress. I saw that you completed about 1.5 million homes in 2023, its highest since 2007. But you know, the industry is still buoyant, it still faces a laundry list of challenges. Going forward, we’re gonna have a chance to talk about some of those issues. But I thought I would just start off with the first one of how’s it going into transition from being the Chief Advocacy Officer for the NAHB to the Chief Executive Officer?

Tobin:

Yeah, it’s, it’s great. So, it’s been since June 1, so I guess, nine months or whatever, whatever the right number is it’s been, number one has been a lot of fun, which is what you want to hear when you’re changing jobs. But more importantly, I think the response by our officer team or five elected builder officers, as well as the membership at large has been very, very positive. And that that was the … that’s always the change or the chance that maybe they still look at you as the 27-year-old kid that you joined as way back when, but they haven’t, they’ve really embraced me as the CEO, and really give me an opportunity to try to do some things differently. And just make some changes and really kind of evolve and NAHB as a company, but also try to move the association forward and really lean into what I think is going to be a pretty darn good few years at least for homebuilding and making sure we’re prepared for that.

Willison:

Well, it’s certainly going to be a challenging next couple of years and, you know, we need millions of more in housing units, single-family and multihousing together. And the Millennials, our largest generation, have entered the traditional homebuying years. How are homebuilders responding to this challenge?

Tobin:

 Well, they’re ready to meet it is, you know, with the high-interest-rate environment, and so many people rate- locked, I mean, that’s really the story of kind of the post-COVID recovery, even though homebuilding was one of, if not the only, industry that seemed to defy the COVID gravity of the, of the larger economy. You know, we really boomed in 2020 and 2021, ‘22, inflation caught up with this and obviously ‘23, we felt the full bite of the Fed’s actions and interest rates and moving up close to 8%, which has kept that net existing home market really locked up. And if you’re a new homebuyer, or first-generational buyer, you traditionally go into the existing market. Well, that really hasn’t been available. We haven’t seen the Baby Boomers moving out as much yet again, same issues. So, in a strange way, 2023 saw new home construction as an outsize portion of the for-sale market because it really was the only game in town, usually for-sale homes are about, on your monthly sales numbers they’re about 10%, 12%. Maybe we saw them up of you know, 30%. So, for us, the members were still very busy. But, you know, it made a slower pace, of course, as you would imagine interest rates still, still were tough, but if you were a creditworthy borrower and you had a down payment, you were, you were looking at new construction, more probably than you ever had before. So that’s — we’re ready to go. It’s just if we could get some of these headwinds out of the way we’ll meet that demand.

Willison:

So, you mentioned the fact that a lot of homeowners are staying in their homes because of what they have, very low interest rates while the economy now we’re seeing higher interest rates. How have builders been able to attract new buyers in this higher-interest rate environment?

Tobin:

Well, there’s a couple of ways. One, that just price reductions, which obviously, you know, the cost of construction is as high as it is whether it’s government regulations or building materials or land costs, you know, so, so reducing prices to try to, try to stay competitive, or we, we’re seeing rate buydowns, a lot of our builders have really leaned into rate buydowns to get people out of those, you know, see, you know, sevens but now we’re kind of firmly in the, in the, in the 6% range for mortgages, trying to buy them down into the low sixes or even into the high fives, that’s really been a very good tool for builders that in this, in this rates are starting to come down, we’re seeing that less and less in our surveys, but it was, it was pretty high, 30 or 40% of our survey builders were offering some incentives, whether again it was price, or buydowns to get people into homes.

Willison:

So, you mentioned the first-time homebuyer, increasingly facing long odds to get any house. Generally, they want a smaller home. But by and large, entry-level homes aren’t particularly profitable for your builders, so they aren’t being constructed in huge numbers. Walk us through some of the reasons for that?

Tobin:

Well, I think, I think number one, you’re talking about just the cost of building a home, you know, 20, about 23% of the cost of a single-family unit is directly attributable to government regulation, and all three levels of government: local, state and national. So that’s, that’s that regulatory stack that I think is really the impediment to building an affordable product. So first, you have the land development process, not only finding land, but then getting it through the entitlement process that takes a while, then actually improving the land. And then, and then building a structure on it. All those stops along the way require going for plan approvals. And you know, local governments move slowly, some faster than others. But generally, not as fast as the speed of money. And so that, you know, if the builders are having those carrying costs, that, that slows the process down. So that’s number one. Number two, then you’ll get material costs, some are still stubbornly high. We talk a lot about lumber prices in NAHB that’s one of the biggest, biggest materials pieces that go into a home. But we’ve seen, we’ve well, those are, those are low, we’ve seen other material costs take a little bit longer. You know, one of the issues we’re fighting now is distributional transformers, those big electrical boxes that sit at the foot of subdivisions, that power homes, those are on, you know, a year and a half delay. So that’s part of the delay process. And then labor, we have a persistent skilled labor shortage in the construction industry, month after month, year after year. And now a decade of about 400,000 jobs, right, so labor’s tight, which means when labor is tight, labor is more expensive. And that all adds to the how hard it is to build that entry-level home that, you know, $350K or $400,000 home. And if you’re from California, if you can find a $300,000 home, it’s like finding that beautiful, cheap wine that everybody seeks. But that’s the real challenge. It’s just this kind of, you know, one after another. Those are the headwinds I talked about.

Willison:

So, accurately to solve that problem: Really small homes in Oregon and Texas, anywhere from 400 to 600 square feet, were recently featured in The New York Times article and I wonder, might this become a trend? Or do you think it’s just kind of an outlier?

Tobin:

I think I ,,, Well, we have seen home size trend lower over the last several years, you know, down from 2400 square feet to 21 or 2200 square feet. I still think people now, and I think that what we’ve seen in the surveys of Millennial buyers, you talked about that large cohort that’s moving into their prime homebuying years, they’re looking for, they’re not looking for a starter home, and then, and then you know, in five or 10 years from now to their move-up home, they’re looking to kind of buy the one home, they’re going to stay in now. So that means they’re going to want that little extra room. And while there certainly is a space for those smaller homes, again, because it’s clearly an affordability issue. What we’re seeing is that I don’t want to call them their forever homes, but they’re not in them for that, that seven- to 10-year range. They’re looking to stay in there longer. Which means they’re gonna want a little bigger home so that their family if they choose to have one can grow into that house.

Willison:

Could you elaborate a little bit more on some of the regulatory obstacles that the builders are commonly encountering and what is NAHB doing to streamline or mitigate some of those concerns?

Tobin:

Well, we work with our local Home Builders Association. We’re a federation of over 600 state and local associations. So we work very closely with them to find ways to streamline the permitting process right, so many, so many local government have, you know 17 different departments you got to stop through from, from, you know, from the, from implementation phase all the way to the end, you’re trying to streamline that, because every is you know, every bureaucrat at the local level wants a little taste and they want to, they want to make sure that they’re, they’re important in the process, and they all are, but maybe we can find a way to streamline that or, or maybe we can find a way to, if you check all of the boxes in a community for what they wanted development to look like or homes to look like. It’s something called buyer right development, that if you check all the boxes, your plan is automatically approved. Those are things that are important. You know, again, just the time it takes, you know, time is money. So if we can reduce, reduce the time that it takes, making land more available, that’s really the one of the things we’re going to face over the next several years is lot availability as developable land, Lord knows we’ve got plenty of it in the country, we just have to unlock it and have a willingness for growth, and especially these communities that are trying to attract, you know, businesses into their communities. I think of Columbus, Ohio, and the big Intel chip factory. Housing has to be part of those equations. So local governments really have to make sure that they are putting housing into their economic development equation. And then, you know, the last one I’ll talk about when it comes to some of the regulatory headwinds is permitting, again, moving things faster. And really, government being a partner with a builder who’s looking to add more supply, that’s really what it’s going to take in order to put more supply in the marketplace.

Willison:

Jim, you know, and I know if you talk to Republicans on Capitol Hill, if you talk to Democrats on Capitol Hill, everyone agrees that homeownership is a worthy good, and that we need more houses. In one of its very final reports, the Trump administration, when it left office in 2021, advocated for eliminating regulatory barriers to affordable housing. Within the first six months of the Biden administration, they created a report with the exact same goal and its housing supply action plan, land use regulations really ranked among the very top obstacles that both of these white papers addressed. And I’m wondering, just from your vantage point, what should be the role of the federal government in trying to lower land use barriers?

Tobin:

Yeah, I think I think it’s the federal permitting process is really critical in … there’s, you know, an alphabet soup of laws. But, you know, when we interact with a lot is the Clean Water Act and the necessity of draining or filling land to make it more developable. You have the NEPA [National Environmental Policy Act] is another one of these, that’s really big kind of thing about big transportation moving large areas of dirt. But anything you can do to, to get the federal permitting process out of the way, you know, we interact with so many different agencies with EPA and the Army Corps of Engineers when I talked about the Clean Water Act, you know, but the Bureau of interior, whether it’s, you know, in and when it comes to Native American lands as well, there’s a lot of stops along the way, it’s really trying to speed that up. Because at the end of the day, local land use laws are really where the rubber hits the road. But there is this federal overlay to make sure that you know, the federal top of the federal safety net, and we get it, we all want clean air and clean water. It’s vital to, you know, just as us as humans, but just the economic prosperity of the country. But there’s got to be a way to balance economic growth with the need for environmental protection. And that’s, that’s really critical. So that’s where the federal government can be helpful. I think another area talks about workforce development earlier, you’re getting the getting lawmakers, especially the President, [to] talk about the trades as a viable career, not just a job, not just plan B if you can’t make it in college, but the trades really are, really a plan A and a great career. Lord knows if any of your listeners have had to use a plumber or are any kind of any kind of one of the trades in your, in your home, you know how much they charge and how scarce they are. So those are some of the things that the federal government can use their bully pulpit and especially leaning into local governments to get out of the way, finding incentives with transportation dollars that can come, they can flow as an incentive, but also tied to lowering those regulatory barriers at the local level when it comes to housing production.

Willison:

Let me follow up a little bit on the labor question you had mentioned earlier. There’s about 400,000 construction jobs that are going wanting right now for a variety of reasons. And it’s kind of been this way, at least trending this way ever since the crash of the aughts. What steps are you trying to take? As an industry to address the labor shortage, and what role might immigration reform play in solving it?

Tobin:

Yeah, perfect. Thanks for teeing me up on immigration reform. So I look at I look at workforces as a coin. And one side is what I’ll call it, you know, training our domestic workforce. So that means, that goes back to what I said about getting, getting more people interested in the trades and reminding them that you don’t have you don’t, you can be successful, highly successful in America without going to college. And so getting more kids in the trades, the average age of a contractor now is about 56, or 57 years old. So, our contractors are getting older, we’ve got to replenish that labor supply with young kids interested in getting into trades, leaning into at risk youth or even training behind the prison walls. And helping people get a job in skill if they are incarcerated. And then, and then when they, when they reenter society, finding them good-paying jobs, we have a workforce development partner called the Homebuilders Institute, they are vital in training, they’re actually the number one contractor for the Department of Labor’s Job Corps program, again, changes trading at-risk youth across Job Corps centers across the country. So really leaning into that, you know, finding the new workforce, by talking to, talking to kids and getting them involved in the trades. The other side, as you mentioned, is immigration reform, the other side of that coin, about 23% of construction labor in this country now, not just home building and construction, at large is immigrant labor. And so we have got to recognize that we have, we have, we have a broken immigration system. And then we need comprehensive reform that goes from the border, securing the border, and allowing people who want to work in this country to come through the border, safely and legally. And then, and then all the way up to what was solving the problem of the 12 or 13 million undocumented people in this country, getting them out of the shadows. And you know, people call it amnesty, people call it, you know, permanent green cards, want you to stand at the end of the longest line, you know, pay a fine, whatever that solution is. But we have got, we’ve got to recognize that that is that is as much part of the equation. And then there stops along the middle, we believe in an employment system that allows workers, that allows employers to go to a federal database to find the work eligibility of an immigrant laborer, and one that, no one that works for, works for employers as well. And then, then the last piece I’ll just mention is we would like to have a visa for construction labor, you know, there’s visas for high-tech, there’s visa for seasonal workers or ag workers, one for construction would be great, too. So, we’re pushing all those, but immigration reform is absolutely part of the solution when it comes to our labor issues.

Willison:

Well, thanks, Jim, your members don’t just do new construction, they do a lot of renovation work as well. And in many cities, you know, we have housing stocks, that’s its aging, it’s often too dilapidated, too dangerous to live in. What should policymakers be doing to make those houses viable again?

Tobin:

Yeah, again, it comes down to it comes down to some of those, there’s a lot of lead paint if you’re, if it was, you know, before the 1970s, you know, probably as lead paint. And so how do you, how do you abate lead paint, there’s a lot of laws where the federal government does interact when it comes to those larger-scale projects, that that we finding ways to make it easier to make those repairs. And in those, those remodels, that’s a huge piece remodeling is going to be a big part of the sector moving forward, people age in place, there is that older housing’s housing stock, people have seen some of their equity rise. So maybe rather than moving in this high- interest-rates space, they’re going to remodel their homes and make it more livable for the long term. But the government should just encourage remodeling as a another, it’s another way to extend the lives of our homes, you know, we’re gonna, like you said at the top that were built about one and a half million units in 2023, that single- and multifamily will build a little bit less than that, or less than that in 2024. But that just means you have, so that means there’s about 130, 135 million homes that were built before this year. And you know, most of them before 2000, that I live in a home, a home that was built in 1985. Those homes need to be remodeled. They’re certainly not the end of their useful life. So that’s why there’s a real burgeoning market out there for remodeling and we think they were pretty bullish on that in the future as well.

Willison:

Let’s focus a moment on energy code requirements. NAHB has some grave reservations about recommendations that were found in the International Energy Conservation Code related to homebuilding, largely due, I think to affordability issues. How does any builder view the balance between meeting housing demand and adhering to some sustainable building practices?

Tobin:

Yeah, so our members today are building the most energy-efficient and resilient home ever built. Full stop. There is the home that we build today is more efficient than the home we built three years ago, and three years from now that home is going to be more efficient than the home today, the idea that somehow we are not as efficient as, as people want. And there’s a real zeal to move to net zero as quickly as possible. Net zero is very, very expensive. And my feeling, and I can and I say this for my members as well, the idea that we can save someone $10 or $15 a month on their energy bills, but the house is going to cost $10K or $15,000 more to purchase. That is not a recipe to get those first-time or first-generational homebuyers in the marketplace. Because the payback is so long, that it’s just not worth it. So what does that mean? Rather than buying a new, highly energy-efficient home, you’re gonna go look for an existing home, that is not as energy-efficient, the windows haven’t been upgraded, there’s not a lot of insulation in the attic. That’s what we’re doing. So, there has to be a balance between moving the code steadily forward to more energy efficiency, while keeping affordability because there are some things that just don’t make any sense. I’ll give me an example. He talks about the upcoming code, there’s a, there’s an effort to put in the energy=efficiency code, not the structural code, the energy-efficiency code, the mandatory EV chargers. It sounds like a great idea, right? Well, what if you’re never going to buy an EV? So now you’re paying for an EV charger you’re never going to use? And the real question is, is that, does an EV charger, is that part of the energy-efficiency package of a home? It’s not? It’s part of the energy-efficient package for your car. But that doesn’t, that’s not going to add one dime of savings to your energy bill, but it is going to add cost to that house. And so those are the three that should be in the structural code. Let’s have a conversation about that. That’s the push and pull of energy codes right now is really balanced-out affordability. Personally, I think affordability has been thrown out the window again, for the zeal of let’s make every new home in America the most efficient home it can be. We’re gonna build 900,000 new homes this year, how about we retrofit the 100 and 30 million homes that were built before 2000? If you care about energy efficiency and housing, older homes are the only place you’re going to really squeeze that energy from.

Willison:

That’s a good point. How is technology changing the way builders are constructing homes and kind of a follow on to that is, is house technology changing what homebuyers expect to see in a new home?

Tobin:

Yeah, I think people want fun tech. You think about when the first programmable thermostats came out what 15 or 20 years ago, whew, that was great. Now you do it from your phone. People want a smarter home, they want, you know, we just came back from our international builder show last week, and saw all the best, the biggest, the best in the latest and greatest when it comes to building products. But we’re looking at, you know, AI is going to be out there. When it comes to housing, where we saw, you know, there’s faucets that monitor your water usage, so you can keep an eye on your water consumption. Certainly, you’re gonna see smarter units where they turn the light off when they when you’re not in, when you’re not in a room. And as soon as you walk in, they turn it on, you know, again, heating and cooling, really trying to squeeze that efficiency out of those units in usage. You know, TVs, you know, the big appliances, they’re getting more energy-efficient. And that’s all tech-related, right? How do you wash a load of clothes with a cup and a half of water, and that will still come clean rather than gallons of water like we had when we were kids. So those things are really important and people want to be on that cutting edge. And, you know, you know, I think about my cell phone, how that cutting edge, that is people want to see that in your home. So we’re seeing that get incorporated into the future. And I think that’s really important. And I’ll just one other piece on tech, but we’re seeing advances in home construction, because we need to combat that, that, that lack of labor. So you’re looking at you know, trusses are now built offsite, trucked over to a house and put up with a crane rather than being built by hand like we used to do. We’re watching where the future has a bricklaying machine. You know, that would take a place of bricklayers. I don’t think that’s ever really going to happen. But 3-D printed homes, there’s all kinds of ways more offsite construction. When it comes to penalization, where you bring four walls in, you bolt them together, again less labor and bolting, which makes its cost a little bit more affordable. So, there’s a lot of innovation in housing again, remember, we’re, we’re an industry that the most that, you know, up until a few years ago, the greatest, the greatest technological advance was the nail gun. So, so you can, you can see, but we are getting ready to make some big leaps in home construction.

Willison:

Jim, the last question is, if there’s three things that either federal or local government could do to really make the job easier of expanding our housing stock, what would they be?

Tobin:

So number one, make land more available, give opportunities for developers and builders to access more land. The more land that’s out there, the less expensive it is. The land is one of the, if not the biggest component to home price, making land more affordable and available is number one. Number two, I would have to say that we have got to find a way to move that permitting process faster, let’s get more homes on the market faster. Again, time is money. And that equals a more or less expensive home. And then finally, I think just leaning into the need for more supply. So many times, local lawmakers have the NIMBY mindset, your “not in my backyard” people who say “I’ve got mine. I don’t want to bid anybody to have theirs.” And they throw up a whole bunch of different robots, parking restrictions, traffic, all these different things. More and more courageous lawmakers look at people and say, “We want a growing vibrant community. We want our kids to be able to live here, instead of having to move out. We want our firefighters, our nurses, our policewomen to stay in the communities that they serve.” And housing affordability is part of that more, again, more vibrant community. That’s what we really need out there, like courage to say out loud, we’re going to build more housing in our community. Those are the three things that I would say that we would want people to really lean into and just know that the only way we’re going to solve the housing affordability crisis in this country is by building more homes, putting more supply in the market, not incentivizing an already expensive product. There is no point in taking a home that costs $700,000. We’re gonna give you a little money to afford that. Why don’t we drop that home price down to $500,000 so people can afford it. That’s really what it is. It’s supply. To paraphrase James Carville, from his days with Bill Clinton, who said “it’s the economy, stupid,” it’s supply, stupid. That’s what we have to do to solve home-price creep in this country.

Willison:

Jim, you’ve been a great interview. Thanks for taking the time with me today.

Tobin:

Yeah, thanks for having me, Kirk, this was great. Thanks.