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Welcome to Deerwood Realty YouTube channel. I'm John Schink, founder and managing broker of Deerwood Realty in St. Louis, Missouri. That's a lot, anyway, you know there's this constant barrage: why are houses so expensive? Why is housing so expensive? We're supposed to have affordable housing, but even that's not really what we want. We want to be able to afford just a regular home, and right now, in most of the country, it's an absolute disaster. Now, this will change, right? This will change. The market is always changing. It goes from hot to cold, and we normally start doing the absolute wrong thing right at the end, which always exacerbates the problem and just causes issues.

But anyway, I wanted to go over an article I saw out of California. I think a lot of people really do believe, well, if we just increase the supply of homes, we'll just get more affordable housing, right? All we need to do is increase supply. Once that happens, market forces tell us that it'll be fine, and if it were only that simple, right? Like how we've had two years of the hottest real estate market on record. Prices have increased like 40% almost across the United States in 3 years, pricing many people right out of the market. And then to top that off, after the inflation of the housing market, then you got to deal with 8% mortgage rates from a thirty-year fixed. Now, this is in November of 2023, so who knows where the rates are going after this. Is it going to nine? The FED held today, but the bond market still has a huge spread between that and the mortgage rate.

So anyway, let's get to this article now. I thought it was kind of interesting. Just, I mean, when you start off with "death spiral in housing," that catches your attention. It says it's getting obscenely expensive to build housing in San Jose. And look, maybe five, seven, ten, maybe ten years ago now, I was looking into developing property. I went to college, I have my degree in real estate and construction management, and I really thought it would be great to develop, develop infills, what I would call infills. So, if you go to neighborhoods where things are kind of on the downside, you know, being able to find some lots and put up decent housing, that's something I found I would enjoy. That's something I thought would be great. However, as I got more and more into it, it became really obvious, really quickly, that you know, at the time I was 34 and getting construction projects through the development process when you're not at least a millionaire, it's problematic, right? Or if the company doesn't have at least a couple million in the bank, you're not getting very far with development. But it also didn't appeal to me. Like, for instance, if you're building housing right now, okay, you could literally be building housing right when a tremendous amount of supply comes online and lose your entire investment.

So, I thought it was quite a bit risky, a little bit too risky for my appetite. So, I just kept the brokerage, and that's kind of where I spend most of my time now. However, at the back of my mind, I still have this interest to develop things. Who knows if that'll ever happen? So what happened is, San Jose, they're like, we need more affordable housing, but we're not getting it, and why? So, they commissioned a report. It doesn't take a genius, but let's go through just like someone like as if we didn't know any better, and let's just see what's going on here. It says it's no surprise that building housing in San Jose isn't cheap, but this year is shattering records for construction costs in the nation's twelfth largest city. A new report commissioned by San Jose officials finds that the residential development landscape for both market rate and affordable projects is bleak as builders face numerous challenges due to enormous economic pressures, including historically high interest rates, soaring construction material and labor costs, and other inflation-related issues.

Well, that's fair, and to be honest, like when you're a developer, you're always fighting something. That's just the way the nature of development. But it says, buried in this study is an astounding figure: the cost of building a single unit of affordable housing in San Jose over the past year exploded by 24% from $757,500 to $938,000, a three-fold jump compared to relatively routine annual increases over the last decade and a half. The cost of building a single unit of affordable housing, and I now look, I live in St. Louis. Some of our more expensive homes are in the million-dollar range. A nice home in St. Louis, I mean, you can probably swing $350,000, $500,000, half a million dollars to get you a pretty nice house, single-family home. The idea that a unit in San Jose to build is between $757,500 and then we go on.

It says, when considering the construction cost of 5 to 22-story market rate housing projects anywhere in the city, the report concluded that potential developers stand to lose hundreds of thousands of dollars in every instance. Meanwhile, rent costs have plateaued or even declined across the region, leaving new projects in the red. The city's study found that even if rents increased by 5% or construction costs decreased by 5%, it still wouldn't make a major difference. And look, there's so much involved in this. Okay, there's affordable housing, okay, and then there's housing that is affordable for people to buy that are actually working and trying to do the best they can in their life. They can't even build affordable housing; they just can't even do that right now.

And then it's in a poll conducted by this news organization this month, that's the San Jose Mercury News, 75% of the region's registered voters think homelessness is going in the wrong direction. So the idea is that we could build these affordable housings, okay, and then we get people off the streets, and then we don't have a problem with homelessness. I'm not sure that's the way that's going to go either. But like the issue I have is, look, you can't get affordable housing, you can't get these units online fast enough because the cost in doing so makes it unappetizing for anyone to develop these things.

And so it says another thing. It says interest rates have really shut down the capital markets, said Sean Milligan, a San Jose based developer. You can't borrow at 9 or 10% and underwrite a project. It's impossible. It was possible when interest rates were 3%. It's kind of turning everything upside down now. Sometimes, people don't realize that it's when you do a development, it's not like you get a fixed rate mortgage at what we're getting one as a subsidized mortgage from Fannie or Freddie. You know, if you see a quote for like, let's just say 8%, okay, a developer is probably going to be in the 12, 13, 14% range right now. There's a significant amount of risk when lending to developers, and so someone has to take that risk on, and the banks have not done. I mean, the banks are already kind of having issues, so it's really a mess.

And then they talk about in the article the kind of spiral. There are fewer projects, the less labor there is, the less labor there is, the fewer projects there are. That desperate hour is going on, so they can't even build and increase their employment because they can't afford to get projects done. This is in San Jose. I suspect this is happening all across the country, though. It says developers also said, layered on top of the insurance rates are difficulties getting projects linked to utilities, with some waiting months for Pacific Gas and Electric to get them hooked up with electricity. Look, if your infrastructure is bad, right, if it's not responsive to development, you know, if you can't like, there's a level and there's a pace at which a developer needs to build a project, okay, that it can't go on forever. You know, he's paying or she's paying every month, and that project needs to get done. And if you stretch it out months, or you know, if you stretch out months, that could stretch the project out for years, so that's no good.

And it says then they get into it. It says can the problem be fixed? Developers and others involved in construction said interest rates will have to go down, and city officials say they're exploring a variety of different levers they can pull to help ease the situation, but the options are extremely limited. Look, it's if you remember back a couple of episodes, we had the National Association of Home Builders, The Association of Realtors, and the Mortgage Bankers Association writing to Fed Chair Powell, and saying, would you please, number one, provide us clarity with your current interest rates, and then, will you please bring them down because we're getting hammered. And Powell doesn't care, no offense, that's not his job. His job isn't to worry about those people. He's trying to get inflation down, that was transitory, remember? Inflation was transitory. So like, getting help from the FED right now is not likely.

And then finally, the last little nugget in the article, it says, but what would make the biggest difference, she said, which is she was one of the ladies involved in the economics who wrote the report, it said would be a tweak in the California Environmental Quality Act, which critics have long blamed for holding up housing projects. If we could get rid of the CEQA or substantially change the CEQA, that would save a whole lot of money and a whole lot of legal fees. Alright, so it's not enough to just try to build. It's not enough to just try to do a development. Now you have to fight lawsuit after lawsuit after lawsuit, and at the end of the day, you have to ask yourself, is it worth it as a developer? And the developers have said no, it's not worth it, so we're not building new housing now.

I have long suspected, well look, development zoning and municipalities all vary, the zoning process very suspect. Okay, I don't have a lot of faith in it. Okay, and I think it's used by people to keep projects from being built. I have to be frank, I think people use environmental policy, I think they use any tool they can to keep development out of their backyard. NIMBY, not in my backyard. I think they actually enjoy having house prices go up. After all, they live there, right? And I think I feel like that's been done for the longest time, and it's always hidden, though, right? It's always hidden. And I think that this, the California Environmental Quality Act, is being wielded by both people who really want affordable housing and then those who don't want it in their neighborhoods. I just have this little article here, a little snippet, you can. I put the link in the description, but this is just something I highlighted. This was about a development in Eureka, California. It says the California Environmental Quality Act requires government agencies to evaluate potential impacts before construction begins while making it simple for individuals or entities to oppose projects. Legal experts, including Hernandez, say it has become twisted to block everything from affordable housing to renewable energy and municipal climate plans. And if you look down at the bottom of the article, and I did not highlight it, which I should have, but here's the end. It says the CEQA was meant to protect water quality, air quality, wildlife, and open space. It's not designed to prevent you from having to experience living in a city where houseless people live. Right?

So, in this particular article, they talk about how they want to do development, and people that are trying to keep people out are using it in that way. It's a very fascinating issue. But look, my main thing is this, everyone says, you know, we just need more supply, right? We just need more. Build more, build more, build more. It's not easy to build. It's not easy, and it's not cost-effective to build, and it gets very, very, very expensive to build. Now, this particular problem right now isn't going to be solved, I don't believe, by bringing on new supply. The stuff we're starting, if we started something today, and remember, this is at probably 12 or 13% rates, those projects aren't going to be done for a year or more, right? And most big projects work in phases, so I mean, you're talking about one, two, three years or longer before a project gets off the ground. That isn't going to bring the supply that we need to the housing market here now. That some people say is the issue. Now, I don't know if you've seen any of my other videos, but my own belief is that there's a tremendous amount of people that own two and three houses in the United States or more, and those investors will sell if they are not able to make a profit on those homes for renting them or short-term rentals. So I think that's where the supply is coming, but it hasn't shown itself yet. So, you know, maybe I'm wrong. Who really knows?

Anyway, with that, I'm going to head on out. Thank you for watching, thank you for listening, and I'll catch you on the next one.