The current housing bubble is about to be unwrapped

The current real estate bubble has been boxed tightly by the Federal Reserve but it is about to be unwrapped. Will this bubble burst or continue its upward momentum?

There are many forces that drive the housing industry and many forces that regulate every step of the way. After you read this post, let me know if regulations will hinder or help the housing industry.

This really isn’t a glass half full discussion. Since no one is paying any attention to our economy, the housing industry continues to move forward but it is only meeting 60% of our new housing yearly production goals. Production is not keeping up with our population growth or our pent-up demand.

It is not a matter if the Federal Reserve has to raise interest rates it is just a matter of when it will happen. Their balancing act will be to time interest rate increases. Their actions will either result in a slowdown of production or a shutdown of the housing industry. The immediate effect of raising interest rates will be an increase in home buying. They may increase interest rates in the winter to give a false sense of success.

This is a no-win situation for the Federal Reserve.

Did you know that housing prices have now reached a higher price point than the 2006 housing bubble; primarily driven by low supply and high demand. 

Another significant issue facing housing is the extent and wide reaching effect of REGULATIONS! Regulations alone will stop the current housing momentum because replenishing new home inventory will be more difficult now than ever before.

Land Development Government Regulations – I believe real estate development is the most highly regulated job generating manufacturing industry in the country by all levels of government. Do you agree?

Starting in the mid ‘90’s, local government changed their approach to real estate development – both residential and non-residential. In part, government’s response was a reaction to development pressures. The public also was established as a key vocal stakeholder in the regulatory process. Since the housing industry did NOT reset during the brief recession of 2001, housing continued to appreciate in value and thus the bubble of 2006 – at least in most markets.

The trend at Planning or Zoning Boards started innocently by asking builder/developer’s the price range of the homes to be built or if any of the retail or office space had already been leased. Or they asked about the square footage of the homes. Or they asked about the HOA documents and the controls which the builder/developer imposed on the aesthetic appearance of the project.

Architectural or aesthetic zoning was born in the early 2000’s and Planning and Zoning Boards started to listen to stakeholder opinions.  Demanding changes to projects based on emotion rather than ordinance based regulations. As a result, local government requested builders to change product, materials, price points, etc. The ultimate goal was to improve the appearance of the homes and increase the value. In return, homes with a higher value paid higher real estate taxes.

Builders could not afford a delay in the regulatory process during the early part of this decade since the market was “hot”! Thus, builder/developers agreed to architectural and aesthetic requests by P & Z Board members and politicians so as not to delay a project. 

Builders also thought the market was deeper and wider because of the sales pace – little did they know that banks and lenders were artificially creating a strong move-up market.

Builders changed their product specifications i.e. granite counter tops as standard, materials i.e. brick as standard, and product designs i.e. larger houses on smaller lots. Government asked or requested and builders agreed.

Government also started to change infrastructure standards i.e. increasing roadway widths, wider sidewalks, more restrictive utility design standards, expanding water quality and quantity control measures, etc. Improvements shouldered by the building industry knowing local government’s lack of the funds for maintenance.

Government is in part responsible for the housing bubble. And now, local government will not revisit their ordinances to reflect current economic times. Because land prices do not directly follow housing prices, builders will have to build smaller houses on smaller lots in the future once interest rates are increased. The market sets the sales price of a home and not the cost.

In the long term, builder/developers will purchase land that is well located with existing adequate infrastructure AND is priced properly for the market. If not, they will not purchase high priced land and simply change the sales price of the homes to accommodate increased costs – as was the norm leading up to the real estate bubble.

Over the past forty years, government intervention in the real estate development industry has been astounding.

Honestly, regulatory changes in our industry have been slow, methodical, and transformational. We, including me, would shake our heads at many of the new ordinances, regulations, policies, etc. and maybe we even fought against these changes to no avail. We believe that it is easier and faster to have a negotiated settlement than a legal settlement. So we have negotiated the best compromise and we move forward with our projects on a project by project basis and with each municipality. As long all builders are on a level playing field but will all know that is never the case.

I could also spend a week on land development infrastructure standards and how these government regulations have changed our design approach – over time.  Or, another week on how zoning ordinances have expanded in scope from only bulk requirements to outlining architectural forms, materials and massing for regulatory compliance.

Unfortunately, we rarely investigate where the root of any change comes from and under what pretense.

Over the past four decades, it is clear government regulations never get rolled back, rescinded, or changed simply because land development lacks a voice. What we do know is that federal regulations take a while to affect local development practices while local regulations have a more immediate impact.

In the 70’s & ‘80’s government planners started to be more active in regulating how communities would grow. The Clean Water Act amendments changed the real estate industry through government regulation in the ‘70’s.

In the ‘80’s and early ‘90’s, we experienced significant recessions resetting the real estate development industry but not the role of government.

The 1990’s was the era of regulation at all levels.

In the ‘90’s, there were four distinct regulatory and philosophical movements that altered the building industry even more than the 1972 Clean Water Act:

1. Smart Growth Principles

The following smart growth principles may guide our future real estate development patterns.

•      Create Range of Housing Opportunities and Choices

•      Create Walkable Neighborhoods

•      Encourage Community and Stakeholder Collaboration

•      Foster Distinctive, Attractive Communities with a Strong Sense of Place

•      Make Development Decisions Predictable, Fair and Cost Effective

•      Mix Land Uses

•      Preserve Open Space, Farmland, Natural Beauty and Critical Environmental Areas

•      Provide a Variety of Transportation Choices

•      Strengthen and Direct Development Towards Existing Communities

•                             Take Advantage of Compact Building Design

 

2. International Council for Local Environmental Initiatives (ICLEI)

“ICLEI - Local Governments for Sustainability is an association of over 1220 local government Members who are committed to sustainable development.  Our Members come from 70 different countries and represent more than 569,885,000 people. “

“ICLEI is an international association of local governments as well as national and regional local government organizations who have made a commitment to sustainable development.”

“ICLEI provides technical consulting, training, and information services to build capacity, share knowledge, and support local government in the implementation of sustainable development at the local level.”

“Our basic premise is that locally designed initiatives can provide an effective and cost-efficient way to achieve local, national, and global sustainability objectives.”

3. The President's Council on Sustainable Development (PCSD)

The President's Council on Sustainable Development (PCSD) was established by President Clinton in June 1993 to advise him on sustainable development and develop "bold, new approaches to achieve our economic, environmental, and equity goals." Formally established by Executive Order 12852, the PCSD was administered as a federal advisory committee under the Federal Advisory Committee Act.

Mission
The Mission of the PCSD was to:

• Forge consensus on Policy by bringing together diverse interests to identify and develop innovative economic, environmental and social policies and strategies;
• Demonstrate Implementation of policy that fosters sustainable development by working with diverse interests to identify and demonstrate implementation of sustainable development;
• Get the word out about sustainable development; and
• Evaluate and report on progress by recommending national, community, and enterprise level frameworks for tracking sustainable development.

National Goals
The following goals express the shared aspirations of the President's Council on Sustainable Development. They are truly interdependent and flow from the Council's understanding that it is essential to seek economic prosperity, environmental protection, and social equity together.

4. UN’s Agenda 21

The Agenda 21 plan openly targets Land Ownership. For over thirty-five years the UN has made their stance very clear on the issue of individuals owning land;

Land… cannot be:
Treated as an ordinary asset
Controlled by individuals
Subject to the pressures and inefficiencies of the market.

According to the UN:

Private land ownership is also a principal instrument of accumulation and concentration of wealth and therefore contributes to social injustice; if unchecked, it may become a major obstacle in the planning and implementation of development schemes.

The provision of decent dwellings and healthy conditions for the people can only be achieved if land is used in the interest of society as a whole.

Do your own homework and investigate the above initiatives and verify how our land development industry has been changed to adhere to these principles.

Local & State Governments

States                                                                                                 50

Counties                                                                                       3,034

Municipalities (city, town, village...)                                         19,429

Townships (in some states called Town)                               16,504

School districts                                                                         13,506

Special purpose (utility, fire, police, library, etc.)                  35,052

And, most have separate ordinances, regulations, standards and criteria. And, most implement the real estate development process differently.

Government Agencies – there is no need to explain the role of each agency. This list is intended to be comprehensive and not all communities will burden real estate development entrepreneurship with a bureaucratic maze. However, over the past forty years, I have seen many more regulations implemented or changed than repealed or rescinded! The agencies specific to where your real estate project is located will be part of the regulatory process and by local ordinance become a “stakeholder”.

LOCAL AGENCIES

·            Environmental Commission

·            Shade Tree Commission

·            Town Engineering

·            Planning Department

·            Town Traffic Department

·            Town Building Department

·            Town Zoning Department

·            Municipal Utility Authority

·            Fire Department

·            Police Department

·            Water Company

·            Sewer Agency

·            Water Allocation Agencies

·            School District

·            Park District

·            Improvement District

·            Drainage District

·            Lighting District

·            Air Quality District

·            Flood Plain District

·            Historical Society

·            Architectural Committee

·            Landscape Committee

REGIONAL AGENCIES

·            Soil Conservation District

·            Watershed District

·            Coastal Agency

·            Transportation District

STATE GOVERNMENT

·            Department of Transportation

·            Department of Environmental Protection

FEDERAL GOVERNMENT

·            Corps of Engineers

·            Environmental Protection Agency

·            Housing and Urban Development

Property Rights versus Eminent Domain

5th Amendment to the Constitution:

……nor shall private property be taken for public use without just compensation.

Definition of Eminent Domain:

“n. the power of a governmental entity (federal, state, county or city government, school district, hospital district or other agencies) to take private real estate for public use, with or without the permission of the owner”

Kelo v. City of New London, 545 U.S. 469 (2005)[1] was a case decided by the Supreme Court of the United States involving the use of eminent domain: to transfer land from one private owner to another to further economic development.

The case arose from the condemnation by New London, Connecticut, of privately owned real property so that it could be used as part of a comprehensive redevelopment plan which promised 3,169 new jobs and $1.2 million a year in tax revenues.

The Court held in a 5–4 decision that the general benefits a community enjoyed from economic growth qualified such redevelopment plans as a permissible "public use" under the Takings Clause of the Fifth Amendment.

A list of several other key legislative initiatives that significantly changed the real estate development industry: (internet source)

Endangered Species Act

The Endangered Species Act, which was passed in 1973, poses a paradox. On the one hand, it is enormously powerful. "In other laws," writes Rocky Barker in his book Saving All the Parts,(1) "federal agencies are required to provide protection 'where practicable.'" But the Endangered Species Act "elevated protection of all species to one of the U.S. government's highest priorities."

Stormwater

Proposed National Rulemaking to Strengthen the Stormwater Program:

EPA is updating its stormwater strategy to focus now on pursuing a suite of immediate actions to help support communities in addressing their stormwater challenges and deferring action on rulemaking to reduce stormwater discharges from newly developed and redeveloped sites or other regulatory changes to its stormwater program. EPA will provide incentives, technical assistance, and tools to communities to encourage them to implement strong stormwater programs; leverage existing requirements to strengthen municipal stormwater permits; and continue to promote green infrastructure as an integral part of stormwater management. EPA believes this approach will achieve significant, measurable, and timely results in reducing stormwater pollution and provide significant climate resiliency benefits to communities.

Land Preservation

The Federal Government owns 29% of the land area in the United States.

The above is only a brief glimpse at initiatives underway at the national level. As regulations are implemented, States will have to change their regulations and trickle down to local governments. As an example, EPA’s new water quality standards will seriously impact the real estate industry by the implementation of more stringent water quality standards for receiving streams. Specifically, wastewater treatment plants must meet new effluent standards which will cause expansion financially unfeasible for local governments.

The impact new era regulations will only be realized as the industry dusts off the recession and gets to work meeting the pent-up demand. However, in my opinion, as costs increase prices will not be able to follow. Builders will quickly compete for the move-up market and the first time homebuyer market will lag behind.

Where will our children live?