How to solve the low inventory dilemma?
03 Nov 2022 John Beacham, the CEO and founder of investment firm Toorak Capital Partners, has never been short of an opinion about the type of housing the US should be producing.
For one thing, he has always been highly critical of the single-family (SFH) model preferred by builders, town planners and – it must be said – a large chunk of US homeowners, arguing among other reasons that they are less cost effective.
Instead, he is an avid supporter of building more accessible dwelling units (ADUs). In an interview last year with Mortgage Professional America (MPA), Beacham reaffirmed his view that SFHs were more expensive than multifamily properties, adding that the US has “massively under invested” in real estate for many years and was not building new housing “at nearly the rate we need”.
“There’s a supply-demand imbalance, and we have been under-building housing for a long time. We’ve got to make more units, and the only way I know to do that really is to do multifamily,” he remarked.
But to do that, aside from overcoming certain prejudices, wide sweeping changes to zoning rules will need to be introduced at state level, a view not shared by the National Association of Home Builders (NAHB), who insist that the majority of homebuyers still prefer to live in SFHs.
There’s no denying, though, that low inventory remains a critical issue. According to the NAHB’s more conservative estimates, there is still a shortage of about one million homes in the US.
Meanwhile, data from the US Census shows that housing starts for SFHs dropped nearly 19% year over year last month, while building permits dropped by 17%.
According to reports, nearly half a million of construction starts last year were for apartments or multifamily dwellings rather than SFHs, although supply chain issues were reportedly causing delays in their completion.
Toorak Capital Partners, which specializes in bridge lending, recently listed the reasons why inventory levels are still inordinately low, including a belief that banks are not providing loans efficiently.
The firm says it has stepped in to fill the breach, providing capital in this space by relying “on multiple sources” to fund loans, through conservative credit standards, close review of construction deals, and what it says is a “deep understanding of local markets”.
The New Jersey-based company, which recently hit the $10 billion milestone in whole loan funding for housing rehab and construction, has so far enabled the construction, renovation or purchase of more than 50,000 rental and owner-occupied units, having funded 26,000 small-balance, business-purpose loans backed by residential, multifamily, and mixed-use properties across the US and overseas, in the UK.
Given the current downturn in the housing market, Toorak appears buoyant but insists the US “continues to suffer a severe housing shortage”, despite demand and prices starting to drop due to high interest rates.
In fact, the slowdown in the market saw the number of active listings jump 18.7% in June from a year earlier, according to Realtor.com.
Beacham nonetheless insists that the fall in prices will not alleviate the core problem.
Speaking to MPA this time around, he said: “(Lack of) inventory is fundamentally a long-term issue for our country, and the fact that prices are beginning to fall slightly in some markets doesn't really affect the core problem at hand.
“The reality is that housing prices in this country have gone up significantly over the last two years. As a result, despite the modest reduction in prices, we still have an affordability issue. When you add in the impact of rising interest rates, even with a slight decrease in housing prices, the actual cost of buying a house is still much more than it was a year ago.
“It's really a long-term issue as we have a growing population. Having underinvested in our housing stock for a very long period, we're still millions of units short of where we need to be.”
Zoning rules are still a sticking issue for him, though.
“In most jurisdictions, zoning is delegated to local authorities. Many local jurisdictions resist affordable housing projects because of concerns about the perceived impact of the projects on local values or the tax base.
“However, we have a national need for more housing, especially affordable units. California has been extremely impactful in this space, as the state has moved away from localities and created a state law that provides homeowners who meet certain criterion the right to build an ADU. This is a great idea that can be replicated in other areas of the country.”
California has indeed slashed red tape around ADUs, including owner-occupancy and homeowner association restrictions as well as a raft of other rules.
With inflation remaining stubbornly high at 8.2% and the economy edging ever closer to recession, Beacham was nonetheless asked if it was getting increasingly harder to obtain funding.
“Construction funding is still available for the right projects, but many lenders are being more cautious about lending. In many cases, loan-to-value ratios are lower than they were previously, reflecting the current environment.”