CLARION CALL FOR GREATER HOUSING INNOVATION

Happy Holidays, from Seattle!

The world of construction appears to be one of the only commodity-based industries yet to become truly efficient in the production of homes, office space and specialty structures. If anything, it is taking longer today to build something with sticks and bricks or concrete and steel – at least that is my impression.

Robert Gordon, a noted Northwestern University economist, estimates the construction industry recorded negative productivity growth around the turn of this century. He called it “multifactor productivity,” which is academia’s way of saying the industry lacks innovation.

Methods to build taller and more complex structures have ushered in cloud-piercing high-rises and architectural achievements that would make the likes of Gaudi and Gehry proud. Think One World Trade Center, Sydney Opera House and Seattle’s Highway 99 tunnel, at 2 miles believed to be the longest such tunnel in the Continental U.S. Determining how to bring homes to market faster and more affordably, however, has seemingly escaped the industry.

Why are innovations in housing construction so elusive?

When asked that question, one local developer blurted: “People are happy to buy the same iPhone as everyone else, but they want a home that looks unique.”

In researching this story, the best answer I found came from the editor of Construction Physics newsletter, Brian Potter: “The simplest, high-level way of explaining the lack of productivity [is] it’s hard to make money trying new ideas in construction, and strategies that improve productivity in other industries don’t really seem to work in construction very well.”

The nation is conservatively 3.8M units short of meeting housing needs, according to Up for Growth, a housing advocacy research group. That includes a shortage of 140K homes in Washington. And that’s only as of 2019 before the pandemic changed many aspects of housing.

The causes for underproduction – which doubled between 2012 and 2019, are multifaceted. They include exclusionary and outdated zoning laws, soaring costs to build, supply-chain backlogs, skilled labor shortages and NIBYism.

No question, the construction business is under enormous pressure to effectively produce homes while staying in the black – no easy task. Steel, concrete and roofing materials contribute up to 80% of typical construction costs. These and many other invoiced items have caused finished construction costs to spike by about 50% since the start of the pandemic.

Government and industry leaders understand a lot is at stake. They are tasked with reversing decades of policy decisions (or indecisions) that have failed America. We face housing challenges from all directions – crumbling infrastructure, historic racial inequity, climate change – with cities, towns and their people all suffering the loss of economic possibilities that come with a housing shortage.

One real estate journalist told me that between 2016 and 2021 more venture capital was put into property-related technology – such as improving user experiences when searching on and touring homes – than any other category. VC proptech investments hit $13.1B through the first half of this year and were on pace to at least equal the yearly record. A portion of that is going toward building improvements, such as developing new materials and increasing offsite modular construction to expedite repeatable pieces of a home.

Yes, there is tangible evidence of progress but we need more breakthroughs – like the development of 3-D printed homes that have recently received national attention more than a year after my blog post on the topic. We also must pursue greater financial resources to research and develop the next big ideas, such as robotics and virtual reality, and bring more technical education online to train future builders in these advances.

Homes have not changed significantly over the past few decades and there is a consumer segment known as “aspirationals,” who, among many of their characteristics, set high expectations of brands, value innovation over sameness and are willing to wait for a breakthrough before embracing the product or service. About four in 10 global consumers fit this profile, a majority of whom are Millennials, the largest home-buying segment in America.

Essentially, more and more consumers are dictating to corporations what they want to see or experience – not the other way around. The CEO of a national firm specializing in residential architecture said he is focused on “designing the thoughtful home” by infusing floor plans with performance capabilities that will save homeowners time, make life simpler and possibly extend lifespans.

Instead of buyers choosing technologies after buying a home, this CEO – and presumably others – are aiming to integrate new tech earlier in the process even when it impacts the bottom line. (The unnamed CEO was paraphrased in a report, “Emerging Trends in Real Estate – 2023,” from PwC and Urban Land Institute.) Weighing the cost against the value added is undoubtedly part of the building development process. Hopefully, more in the industry will lean into risk-taking, otherwise, improvements will come more slowly if at all.

If Henry Ford could slash the time needed to build the Model T from 12 hours to roughly 1.5 through process improvements, similar thought should be harnessed toward innovative housing techniques. Sure, consumers won’t embrace assembly-line construction if their home looks the same as the neighbors'. But if we could work toward reducing the construction cycle by, say, 50% – from design to occupancy – builders could theoretically offer homes for less while improving affordability.

“Innovation thrives when entrepreneurs can experiment cheaply and fail without too much catastrophe,” The Atlantic recently wrote. “In housing, experimentation is expensive and design failures fatal.”

This is not just a Seattle concern, but I expect that our region – home to pioneers, innovators and the creative class – will welcome the challenges of improving home construction methods, tech integration and (the hard part) making it more affordable.

We live in a special part of the world. Our region is home to global leaders in cloud computing and commercial space travel, we shine in institutional research for medicine and are the corporate home to the world’s original mass producers of desktop software, lumber and paper products, and aircraft.

We are not shy to dream and to fail. With failure comes success, so what are we waiting for?

DECEMBER HOUSING UPDATE

The chill in the air may not be coming from an Arctic blast. Some might argue the cold is emanating from the near-frigid Q4 real estate market, knocking the bloom straight off the housing-market rose in our region.

This year’s “cold down” is stark, with 36% fewer new listings and about 26% fewer homes under contract (Pendings) for all King County home types combined as well as single-family structures alone – and that’s simply from October to November. Pending sales are a forward indicator of existing home sales (leading by 1-2 months), meaning December and January figures will likely be bleak.

The number of active King County listings, as of Dec. 1, was about 17% lower than Nov. 1. Active listings are sharply higher from last year, including a ridiculous 688% increase among Eastside single-family homes and more than 200% higher countywide.

Buyers are finally receiving a break on prices, falling sharply from October for single-family homes and among all home types (single-family, townhome and condo combined). Prices stand at $750K across King County, down 7.5% in a month, down 3.9% to $1.152M on the Eastside and 3% lower to $824.9K in Seattle. Single-family prices in King fell a remarkable 8.4% in a month to $827K, while declining 2.5% on the Eastside ($1.316M) and 4.7% in Seattle ($905K).

Eastside prices are now running in negative territory year-on-year (YoY), including down 7.8% for single-family homes, astounding after YoY prices were up 35% in the 12 months ending November 2021. A wide swath – from Kirkland, Redmond and Woodinville north to the county line – is seeing YoY price drops of around 14% for single-family homes.

This is far beyond a “seasonal norm” and reflects a market correction following two-plus years of pandemic-driven price appreciation. The market had to slow down at some point.

North King – led by Shoreline – bucked the downward trend by seeing median prices rise 8.4% in one month for all home types to $799K, while single-family prices rose 4.5% since October to $817.5K. Prices are up 5.5% YoY for North King homes.

“There is definitely a belief that home prices will go down,” noted Ali Wolf, chief economist for real estate consultancy Zonda. “Consumers are saying, ‘Why would I buy now if prices are lower in two months’ time or three months’ time?'” she said in November.

In addition to lower prices, a glimmer of hope is that inflation numbers will eventually decline and help lower interest rates. Rates for inflation and interest tend to move in parallel. In fact, the number of mortgage applications rose briefly as interest rates fell following October’s slowdown of inflation growth. (Does this signal a peak in mortgage rates or a temporary blip? Read my real estate forecast blog post after you finish the newsletter to learn more!)

Meantime, condo activity followed a similar track as other home types in King. The county saw a 33% drop in new listings and a 15% decline in active homes for sale since October. Pending (14%) and closed sales (24%) also fell sharply for the month. Prices declined 5.4% in King ($468K), 6.3% on the Eastside ($569.5K) and 8% in Seattle ($480.5K) in the past 30 days. The Seattle luxury condo market is taking it on the chin, with prices in downtown/Belltown down 19% for the month and 24% YoY ($515K) on 7.7 months of inventory.

Inventories across the county for all home types now stand at 2.2 months, up from 2.1 in October. Single-family inventory is unchanged from October at 2.1 months. Exclusive neighborhoods such as Medina and Mercer Island have roughly 4 months of single-family inventory.

The four-county region of King, Snohomish, Pierce and Kitsap is on a pace to be the slowest year for total home sales since 2011.

In addition to King County’s sharp 7.5% median price month-to-month decline on all home types, to $750,000, Snohomish County saw a 3.2% drop ($677,475). Pierce experienced a modest 1.4% price drop for the month ($517,500) while Kitsap lost 1.0% ($505,471). Single-family home prices in King stumbled 8.4% in the month ($827,000), while Snohomish prices fell 4.1% ($700,000), Pierce lost 1.9% ($525,000) and Kitsap 1.5% ($505,471). Year-to-year, single-family prices were higher across our region but little changed, up 0.9% in King, 0.7% in Snohomish, 1.9% in Pierce and 1.1% in Kitsap.

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