NAHB’s Robert Dietz talks housing supply and policy

Below is the transcription of the interview. These transcriptions, powered by Speechpad, have been lightly edited and may contain small errors from reproduction:

Robert  Dietz: There’s a large discussion about will we see inflation this year and what will that mean for interest rates and mortgage interest rates but, you know, if you had to pick one commodity right now that kind of sums up where we are for the housing sector and the overall economy, it really is lumber. Lumber prices are up 200% year over year, it’s adding $24,000 to the typical newly built home which is about 2,600 square feet. And let’s not forget multifamily and the rental side of the sector, it’s adding probably about $9,000 to the typical apartment as well.

Alcynna Lloyd: Hi, Housing News listeners. This is Alcynna Lloyd and I’m the producer of this weekly podcast, which is a proud member of the Industry Syndicate. You just heard a quote from today’s guest, Robert Dietz, the Chief Economist and Senior Vice President of Economics and Housing Policy for the National Association of Home Builders. In today’s episode, our host, Sarah Wheeler, and Dietz discuss homebuilding trends across the country, as well as housing policy, and the budding market for building to rent. As always, thank you to our sponsor, USMI. And here’s Episode 13 of season 5 of the “Housing News” podcast.

Sarah Wheeler: Welcome, everyone. This is Sarah Wheeler, editor in chief at HousingWire, with the latest episode of our “Housing News” podcast. I’m very excited to introduce our guest today, Robert Dietz, the Chief Economist and Senior Vice President for Economics and Housing Policy for the National Association of Home Builders. Robert has published academic research on the benefits of homeownership, federal tax policy, and other housing issues. And has testified before Congress on real estate policy issues. He is often cited on housing and economic issues in major media outlets. And prior to joining NAHB in 2005, Robert worked as an economist for the Congressional Joint Committee on Taxation, where he was the committee’s real estate expert. Robert, you’ve been a guest before here on “Housing News,” and we’re delighted to have you back. Welcome.

Robert Dietz: It’s great to be back. Thank you.

Sarah Wheeler: Thanks for coming on, especially when right now one of the hottest topics is right in your wheelhouse, which is inventory, right? So we had housing starts jump up in March with single family housing starts at 15.3% over the month. And we’re up 37% from a year ago. But you know, we had COVID this time last year. So I’d love to just get your opinion on housing starts right now.

Robert Dietz: Yeah, housing starts at the beginning of 2021 have actually come in a little stronger than we expected. We use our builder confidence measure the NAHB/Wells Fargo Housing Market Index, as a way of tracking where housing construction is going in the near term, it peaked at a level of 90 on 100 point scale back in November with really, really strong buyer traffic numbers, those numbers, of course, being driven by all the events that we saw in 2020, historically low interest rates. And of course, just a really tight resale market, which is driving demand to new construction. Since that point in November, builder confidence has softened, it came in at a level of 83 here in April. It’s still strong reading, it’s above a 50, which is indicating growth in construction. What we expected at the start of the year was growth, but maybe a little slower growth rates because of some of the challenges the industry faces, but the rate of construction is continuing to come in strong. So I think there’s an expectation that the market is really under supplied. The building industry is doing everything it can to add that much needed inventory. But we are going to face some challenges here in 2021 as that pace of construction continues.

Sarah Wheeler: Well, let’s talk about some of those challenges. You know, COVID presented a number of challenges for a lot of industries, but from a supply…you know, just from your building supply issues and things like that, talk about that.

Robert Dietz: Yeah, I mean, this is an issue that’s being faced by policymakers and the Federal Reserve. There’s a large discussion about will we see inflation this year, and what will that mean for interest rates and mortgage interest rates. But, you know, if you had to pick one commodity right now that kind of sums up where we are for the housing sector, and the overall economy, it really is lumber. Lumber prices are up 200% year over year, it’s adding $24,000 to the typical newly built home which is about 2,600 square feet. And let’s not forget multifamily and the rental side of the sector, it’s adding probably about $9,000 to the typical apartment as well.

So lumber is used in residential construction, non-residential construction. It’s in short supply because we’re not producing enough domestically, we saw a little bit of a downward dip in the level of sawmill production in the third quarter of last year. The good news, it’s not all we need, but it’s moving in the right direction. We saw by the end of the year, sawmill production was at about a 13-year high. And yes, I talked about lumber, but it really is all building materials that are in really tight supply. So you talk to a builder, or you talk to a modeler, or you talk to someone that’s at, you know, a home improvement store or lumberyard, they’ll tell you a lot of these materials. We don’t have access to enough of them right now. And it runs from everything from structural lumber down to literally the nuts and bolts that go into building a home.

Sarah Wheeler: So why is that? You know, was it because just the global supply chain or, you know, walk us through why those things are in such short supply?

Robert Dietz: Yeah, so outside of the lumber sector, it really is…it’s what we’re seeing globally. It’s that the supply chains are heavily disrupted. I mean, if you’re looking for a metaphor, there was no better metaphor than that container ship that got trapped in the Suez Canal. That was affecting European supplies in a direct way. It was a great metaphor for where we are right now. And so yeah, the global supply chains are disrupted. And then individual material sectors like lumber, for example, we’re not producing enough domestically given the increase in housing demand. And it’s not just new construction, but remodeling as well. I think we know the changes that took place in 2020, which was a renewed focus on home. And so it wasn’t just builders investing in housing by constructing new housing for the sector, but the fact that individual homeowners were improving their homes.

And that created this, you know, unexpected, at least from the perspective of the end of 2019, an unexpected demand increase for these building materials. And it’s just gonna take a little bit of time to get back up the pace. This, by the way, connects to that broader issue of the Federal Reserve and monetary policy. Chairman Powell has talked about the fact that we expect to see an increase in inflation in 2021, as the economy reopens. And we’re going to have the best year for GDP growth since 1984. But the question from a policy perspective is, are these price challenges temporary? Or are they permanent? And so the hope is that as we get additional building materials in the homebuilding space, and as the rest of the inputs for the overall economy begin to step up, that those inflationary pressures will prove to be temporary. And thus, we will be able to keep monetary policy and the easing condition as labor markets heal over the next year or two.

Sarah Wheeler: That’s so interesting. I mean, I never thought that I would become a lumber nerd like I have this year. We’re just around here at HousingWire, we watch it, we’re reading about it, we’re following people on Twitter, but it’s just very interesting, and not something I knew anything about before this last year.

Robert Dietz: Same here, I actually wish I’d taken less tax law, my background is really in tax and economics, and more in wood products. You know, it’s just understanding softwood lumber versus hardwood lumber, what goes into the frame of a home versus the floor in a home or kitchen cabinets. It’s an interesting space. And of course, this is where the economy is focused. We have to remember, housing was that bright spot for the economy in 2020. The rest of the economy is beginning to pick up speed. And unfortunately, we’re going to see some of the consequences in terms of these higher material costs. And then the fact that interest rates will be trending higher over the next year or two.

Sarah Wheeler: How does that homebuilder figure that out? So you know, lumber went up, adds $24,000 to the price of a house. Well, you contracted on that house. How do they account for these really wildly big changes in material prices?

Robert Dietz: It varies builder by builder, by size, by type of home being built. We do surveys in the industry. Some builders are including price escalation clauses, a limited number of builders do situation where the builder and the homebuyer essentially share some of the unexpected growth in material costs. And then we expect a certain number of builders are literally throttling sales, regulating the number of sales that they enter into, to make sure that that production chain for their own company can deliver the homes that have been contracted for sale. So it’s a limiting factor. I think overall from the economics of the industry. We know the homebuilding industry is going to expand this year. It’s going to be the best year for single family output since the Great Recession, but new home prices are going to have to rise.

You know, we saw single digit gains last year, I think that will continue this year to cover the fact that the input costs are higher. And let’s not forget, you know, we’re talking about building materials but we still have challenges in a skilled labor shortage in terms of the middle skills crisis. We have policy reform that needs to take place in terms of zoning improvements to allow more missing middle, low density, single lot or single family housing for entry level buyers. These kinds of policy changes that will allow us to add that incredibly needed inventory for the market right now.

Sarah Wheeler: You know, so much of…I have comments on everything you just said. So, you know, what we’re hearing, as we call around for different markets, is exactly what you said that home builders are like…you know, they’re not even taking…they might be a year out and they’re like, you know, putting the brakes on, because who knows what that looks like a year out. And then the other thing was on the skilled labor force, you know, what do you see what happened last year? And where do those people go? Are they coming back? You know, what are you seeing on that?

Robert Dietz: There’s a really interesting divide within the construction industry right now. And I think it proves what we’ve been saying about the skilled labor shortage within the residential building space. Last year, you saw in residential construction, home building, apartment development, and remodeling, the industry actually added 90,000 net jobs. In other words, we’re one of the few sectors that ended the year with a larger workforce than it started with, and in a period of time where jobs overall were down about 6%. So essentially, the residential construction sector took advantage of the fact that there were people looking for work from other sectors, and they brought them in. Non-residential construction, so outside of housing, a little bit different story, they’re still down in terms of employment. But when you consider the construction industry as a whole, we’re short, 200,000 to 300,000 construction workers.

And so we’ve got this long-term challenge. It’s partly due to demographics. It’s due the fact that from high schools, we send more people to four-year colleges. And I think we have a broader policy discussion that we have to take place of, are we doing the right thing by building up student loan debt, sending people to four-year institutions where the graduation rate’s only about 60% over 5 years, and I say this as someone married to a college professor, so I kind of want to step carefully here. But, you know, community colleges and trade schools are the hidden gem of the education system. And there are jobs in demand, not just in construction, but manufacturing, transportation, energy, green energy, the middle skills, and that’s really where we need to make that human capital investment in the years ahead.

Sarah Wheeler: Yeah, super interesting. You know, you talked a little bit about housing policy there on different parts. You know, we saw a couple years ago, when California changed the law from a state level to allow accessory dwelling units, and what that has done in that state. Do you see that taking off in different places? Do you see that as the future-like states coming in and sort of overriding for things like that?

Robert Dietz: Yeah, I think that’s one way that you can carrot and stick approach, make the necessary changes at the zoning rule level. ADUs are a great example. We have a housing deficit, you know, Freddie Mac just put out some great estimates, single digit million number in terms of the shortage for single family housing. And Freddie Mac also put out a great estimate that we have 1.4 million ADUs. Well, ADUs are coming in the system, because it was harder to build that missing middle, it was harder to build multifamily and single family. I don’t think necessarily ADUs represent a permanent solution, you know, for that perspective forming household that’s looking for a small single family structure, and ADU’s not a great substitute. But it’s a way of adding supply in a supply start market.

And I think what we’ll see is states go through in terms of what their market needs, some places it may be ADUs, and other places it may be let’s try to fight exclusionary zoning, let’s do small lot, single family detached housing, or in some cases, let’s transform retail spaces that are going to be vacant, because we’re not using as much, and turn them into residential developments, places with townhouses, with low rise multifamily. So I think that urban village concept is something we’re going to see. And it’s going to present a great redevelopment opportunity for the construction industry. And then, of course, all the stakeholders that finance and supply that kind of construction.

Sarah Wheeler: Where do you see…is there a part of the country that you’re like, “Wow, they’re close to either innovating or they are innovating”? Or is there a part of the country that you think is maybe leading the way on this?

Robert Dietz: I think in the Northeast you do see some of this redevelopment type opportunities. I think that’s just a function of the kind of housing stock that’s in place, and the limits based on geography or where building can take place. But the geography story right now in terms of housing and home construction is really interesting, because, of course, you have the traditional areas where lots of homebuilding takes place. You know, the top two markets in the country are Dallas, and Houston, you’ve got Austin in the top five. So Texas and the Southeast, lots of population growth. Mountain states continue to grow because of affordability. But in 2020, you also saw places, and I say this as a native Midwesterner, places in the Midwest, Columbus, Indianapolis, Kansas City, they have really great growth rates in terms of single family construction. Why? Well, because households and even some businesses are voting with their feet moving to some affordable markets. And I think that’s a great opportunity for markets that have seen a little more flat level type population growth conditions, and could see some revitalization and additional growth.

Sarah Wheeler: You know, we’ve been doing a series on some of those, like secondary markets that you wouldn’t think would be hot that are super-hot right now. And there are five of those in Idaho. One of them is Pocatello, Idaho, which I only knew because my sister’s husband at one point was getting a job there. I was like, “Where’s that?” And then it popped up on this list. And I was like, “What? What is going on?”

Robert Dietz: Boise, if you look at the housing stock there from 10 years ago to today, it’s amazing. And affordability conditions in a metro like Boise have actually gone down because prices are rising faster than local incomes. So yeah, I mean, some of these mountain states and markets, Utah and Northern Colorado, they’re essentially benefiting from, unfortunately, some of the, you know, more challenging affordability conditions that you see along the West Coast. So I think there’s a real opportunity. I think buyers and renters are more empowered because of a partial persistence of telecommuting. I think that’s going to continue out of this. You know, we’ll see more workers, maybe a third of the American workforce work under a three-two model of three days in the office, two days at home. And that means the weekly commute, when you add it up, is gonna be smaller. And so people can drive further to qualify, and that’s going to present additional opportunities for people to get more bang for their buck, whether they’re renting or buying.

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Sarah Wheeler: We talked about materials and traditional building materials, obviously, you know, wood takes a long time, lumber is expensive. And so there’s always this talk about, you know, what about these non-traditional building materials and building methods, you know, like having it factory built and shipped and put up. But I guess my question is, when I look into those, it always seems like it’s not the traditional builders. So is there an appetite among, you know, the home builders that you work with to really look at some of these alternatives? Or is it just right now still pretty fringe?

Robert Dietz: So necessity is the mother of invention. And I think the fact that home prices or material prices have increased so much, there’s a demand for innovation. I think that’s something we’re going to see, you know, when you go to the trade shows over the next year or two, like the International Builders Show in 2022, you’re going to see new products, you’re going to see new construction techniques. But use the word fringe, you know, I’d say maybe the shares of some of these things are quite small. So for example, in framing, 90% of single family homes are wood framed, 9% are concrete frame, most of those are in the Southeast because of hurricane codes, and a little less than 1% are steel framed. But when lumber prices are as high as they are, you know, the alternative framing methods, maybe it’s 3D printing. The investigations are taking place.

So you get some justification for doing that research. That said, as you mentioned, you know, for example, modular and panelized construction, factory built, shares tend to be pretty small, in face, 3% are systems built. In other words, built in the factory in terms of panels and frames. But I think over the next two to three years, you’re gonna see some of those shares increase, due to the fact that the opportunity costs have changed with an elevated level of lumber pricing. So this is a great time to be in the space in terms of building materials. If you can pitch a product that will save time in terms of construction labor at the worksite, or it can provide a way to provide additional material, I think builders and remodelers are going to take a second look.

Sarah Wheeler: That’s great. So I live in a pretty new community that is built completely traditionally, it has traditional builders. But I wonder if you had some non-traditional things come in there. What does that do? Is there acceptance among people living in a traditional community to have like, you know, a modular home, or to have like a 3D printed home, or some of these things you talk about, you know, because we know 3D printed homes come up anytime we talk about this. But I think there’s only one community or two communities in the entire nation that have a community of those homes. You can build one, you know, on a lot somewhere, but I just don’t see that large uptake yet.

Sarah Wheeler: 3D printing, I think, is not quite ready for primetime. It’s been interesting to see some of the developments there. You know, I have a two story example that’s 3D printed on the first floor but the second floor is traditional wood framed as is the roofing and the trusses. But when it comes to modular and panelized construction, you know, if you’re talking about a home that’s sold on a lot that’s owned and is as a traditional foundation, you would not be able to tell the difference between that kind of home and a more traditional site built type structure. Manufactured housing is a slightly different story, we still have about 100,000 units there, the ownership of land’s a little bit different. But I think with modular panels, you’re going to see any increase, but it’s going to be regionally concentrated, because you need economies of scale in terms of the delivery of that kind of housing. 3D printing, it’s a little bit ways out there. But again, you know, when you’ve got really high demand, and the pricings become difficult, you’re going to see the industry innovate out of necessity.

Sarah Wheeler: This year, everyone talked about, you know, we did see a renewed focus on home, and on space of the home. So what are you guys seeing as far as the average square foot of a house? Is it going up? Is it going down? What happened over the last year?

Robert Dietz: Yes, over the last four or five years, new home size was falling, it was falling for a good reason, by the way, though on median basis it was the attempt of the industry to add that really needed entry level type smaller housing. But right now, in 2020, according to data we saw, a new home size level off after those declines. And my expectation, and it’s consistent with the survey data and the consumer preference data, 2021 and 2022 we’re going to see increases in new home size. In fact, the top feature in the consumer preference data that we collect in terms of changes in buyer preferences was an increase in demand for home office space. And not just a single home office, in some cases two or at least, an additional room that can be both a media/game room and a home office. So that requires additional space.

And look, you know, if you think about it from an aggregate economics point of view, we’re taking activity that used to occur in commercial real estate, and it’s occurring out in residential real estate. And so that requires a larger capital stock, which means more housing. So I think we’re gonna see some of the design changes continue. We’re also seeing growth in multi-generational housing. I think that’s also consistent with a more diverse population in the United States. And so this is an exciting time for housing, it seems like it’s been exciting for the last 15 years or so. But I think you’re gonna see a considerable amount of change, whether it’s the geography, building methods, or the kinds of housing and their design being put in place.

Sarah Wheeler: I love that, you know, when we built our house, I got the home office. And you know, at the time, I was like, “Okay, I got the home office,” you know, and I’ve never been so happy for that choice over the last year. My husband got a media room, I was like, “Okay, then I get the office.” And I thought, “Oh, that’ll be a fun thing.” And it was like, “Oh, yeah, I won out on that one.” And to your point of just like spending more time at home, and of course, we all hope that, you know, kids can be back in school in the fall, and that’s not going to be a thing. But when you have everybody in the house at home all day long, all the time, it really does…it changes the whole dynamic, as opposed to we’ve all been somewhere all day, now we’re coming home, it’s just a different thing.

Robert Dietz: Right, and the push and pull there, I think, is evident, which is as people return to the office, there’s definitely going to be a demand for that in terms of the culture of business operations. But you know, there is that upside in terms of flexibility of schedule, and allowing workers to pick and choose when they commute. And that’s going to require some additional space in the home.

Sarah Wheeler: You know, one of the stories that we’ve been talking about, you mentioned Austin being a huge hub. And we think it might be the hottest market in the whole country, just from a jobs standpoint, you know, where a lot of these markets are hot because people are going to be working remote from there. But Austin, I mean, the jobs are there, and they continue to go there. So I’m not far from Austin, here. And you know, it’s had infrastructure issues for 25 years. So it’s going to be really interesting to see how that… I mean, they were anti-growth for a while, so they didn’t want to build the infrastructure, the roads to really handle this. So it’s going to be interesting.

But one thing that we heard even just this week was the kind of things that you would normally see in the Bay Area of California are happening in Austin, where a real estate agent told me that a builder was going to open up some lots, so a new part of their development. And they’re taking bids over the internet, like you’re bidding now…you’re now competing for those lots like you do because people are getting bid out for homes, for existing homes. It’s the same thing now there. And she said that the last time that they opened something up, I think it was in November, they had people camping out for three days to get on the list. And she’s from California, so she was like, “Oh yeah, this is normal.” But no one in Texas thinks that’s normal. So I would love to know what you think about Austin specifically.

Robert Dietz: Yeah, like I said, in the top five in terms of single family building, if you look at the amount of multifamily development that’s taking place in Austin, and it is that reflection of both relatively greater housing affordability than, say, some of the California markets. And I think we’re seeing that interplay between households relocating, and then businesses chasing households, and households chasing businesses. That you’re going to see some of these employers locate to a market like Austin. And so, you know, I think that’s going to occur, and I think it’s gonna occur in a lot of markets, the stories won’t be as big with such high profile company names, as you see in Austin. But you’re going to see markets get a second look from employers. I mentioned before the Midwest is a great example. They’re going to look at markets like Columbus, Ohio, and Kansas City, because of affordability conditions for their workers. And I think that’s going to result in some movement of both household level activity and business activity here in the next few years.

Sarah Wheeler: It’s such a changed landscape. Really interesting. My husband’s from Kansas City, we’ve visited there many times. And I would not have thought…and I love Kansas City, but it’s just interesting to see that just take off.

Robert Dietz: Yeah, absolutely. I’m Midwesterner, so I’m partly talking markets I know really well. It’s going to be an important lesson for local policymakers, which is, if you want that business activity come and the growth in the home base, you have to allow your housing supply to increase. So the concern is, and you mentioned this with me on some of the Texas markets, if policymakers start to say, “Let’s slow down some of this growth,” you’re essentially undercutting the advantage that’s causing that growth to take place in the first place.

Sarah Wheeler: It is such a push and pull, it’s going to be really interesting. So Robert, tell me, what are you seeing in the whole build to rent?

Robert Dietz: This is kind of a really interesting place. So we talked about the fact that people need more home size, that consumer preferences have moved to single family. But of course, we know not everyone can afford to buy a home, you know, whether it’s the down payment requirement versus getting some policy looks in terms of the Biden tax credit. But you know, for a lot of people that want that single family home, renting is legitimate and good option. So right now we’re seeing about 4.5% of single family starts are built for rent. Probably another 2% of single family starts are sold to an investor for rental purposes. So that’s 6.5%. And I think that share’s gonna go up over the course of 2021 and 2022. We see capital moving in this space, and we know the demand is there. So that’s going to be something to watch over the next year or two to see if that’s…you know, post some gains in terms of market share. And it’s gonna be really interesting to see the kinds of single family rental units built and developed. A lot of them tend to be townhouses. But the geography here is just going to be really interesting. And I think that’s another way that we can add housing to the overall economy.

Sarah Wheeler: So I know that there are now whole built-to-rent communities, right? So it’s not just like they’re coming into a community, but like a whole community plan for that. What does that look like?

Robert Dietz: Yeah, so you do have master planned communities, and traditionally single family built for rent, you know, kind of one-off type projects, or small little development. But now you’re talking about master plan communities that have the amenities you would expect, you know, that tended to be concentrated like an apartment building, but it’s in a single family type neighborhood. And so that is an option, particularly if you’re going to move to an area and you’re not going to stay longer than three or four years, single family rental is a great option. So one of the things that we know that the single family market is tight in terms of resale inventory, is because people, when they move, have chosen to rent out the one-off type house that’s in a neighborhood. But this development, this intentional development of single family rental really is a change that’s coming. I do think the market share is gonna grow.

Sarah Wheeler: We’ll definitely be watching that. It’s just been an interesting development over the last couple years. So thank you for that. Well, we’re wrapping up. I wanted to ask you one last question, which is, what are you excited about? As you look at this next year, you guys are front and center now. And you have been for a long time. But I just think that, as you said, the spotlight’s been on housing the last year. What are you looking at over the next year that really excites you?

Robert Dietz: I mean, the innovation we talked about, I think is there. I think from an analytics point of view, it’ll be watching some of this demand rollback from exurban type markets more into the medium density neighborhoods. So one little hint of a data point that was really interesting at the end of last year was we had in the fourth quarter of 2020, the best quarter for townhouse construction in a year and a half. And that would be consistent with the idea of some of these more medium density neighborhoods starting to see demand go up. I think, you know, in terms of the homebuilding industry, it’s housing equals jobs. And so with continued growth in single family construction and multifamily construction, we will see the labor force of that industry or our industry continue to grow. And, you know, we were leading the economy last year, and now we’ll see some of the benefits play out.

Sarah Wheeler: Wow, so glad to have you on. Thank you so much for coming on sharing your insights. We’ll have you on again in a couple months, because things are changing fast, and we love having your perspective on that. So thank you so much, Robert.

Robert Dietz: Sounds great. Thank you very much.

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