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Musings Report 2024-20 5-18-24 The Problem with Housing
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The Problem with Housing
The problem with housing is that it isn't merely a financial investment, it is a large, complicated physical object subject to the forces of Nature and Time. In our finance-dominated zeitgeist, this reality receives precious little mention: housing is presented as an asset in the financial realm: what matters is the Zillow estimate of valuation, mortgage rates, etc.
To someone who has spent 50 years in the building / construction / renovation-repair world of "houses as physical objects," this reduction of housing to financial data points seems insidiously disconnected from reality. Houses have value because they have utility value as shelter. Once this utility value is impaired, the valuation shifts from pure finance (comparable sales, etc.) to real-world factors.
As the tide of financialized asset bubbles recedes, the "analog / real-world" valuation factors of shelter may take precedence over "real estate as an asset to park surplus cash in" and housing-bubble-speculation.
In the vast sea of finance-focused real estate coverage, articles that address the physical realties of housing are rare. These two examples are noteworthy:
New Florida Law Roils Its Condo Market Three Years After Surfside Collapse: More units are being dumped on the market because of six-figure special assessments tied to repairs for older buildings.
Homeowners say their new D.R. Horton houses are practically falling apart months after moving in.
These articles shine a light on issues that are intrinsic to buildings:
1. Every structure is prone to aging and decay.
2. Shoddy construction and low-quality materials have consequences.
3. It takes a lot of time and money to restore functionality lost to obsolescence and/or defects.
Regarding the Florida high-rise condominiums: if the average person thinks about concrete at all, they think of its durability: look at the Roman aqueducts still standing after 2,000 years--concrete is pretty much a "forever" building material.
But modern concrete is not the same as Roman concrete. Modern concrete is strengthened with steel reinforcing bars, a.k.a. rebar. Roman concrete had no metal reinforcement. Should moisture reach rebar, the metal rusts and this corrosion expands, breaking the concrete, allowing more moisture to penetrate into the concrete and corrode more rebar. The concrete eventually chips or flakes off, i.e. spalling.
Concrete with rebar isn't a "forever" material. To minimize the odds of spalling, rebar is coated to resist moisture/rusting. But will this coating protect the rebar for 100 years, or 500 years? Maybe, maybe not. We don't know.
What we do know is minimizing the risks of moisture seeping into concrete and repairing spalling are expensive, especially in tall, heavy concrete structures.
In wooden structures, the enemies are 1) water, which enables dry-rot, 2) termites, for whom wood is dinner and 3) settlement or shifting of the ground beneath the building.
Wooden structures protected from dampness can last hundreds of years. The problem in modern housing is many points of moisture / seepage may be hidden inside double walls, inside attics beneath insulation, and so on. Moisture can collect on surfaces due to condensation, and roofs that look fine from the outside can leak.
Building materials and hardware vary considerably in quality and thus in durability and functionality. As a general rule, modern materials and hardware are lower quality than those available 40 or 50 years ago.
I recently replaced two interior doors that were delaminating (the veneer was peeling off). The doors and door knobs (locksets) are 50 years old, and the locksets still work perfectly. These were standard locksets, not some super-costly high-end hardware. In my experience, the likelihood of recently manufactured standard locksets working perfectly after 50 years of use is low. In my experience, the finish wears off or corrodes and the internal parts break or wear out long before decades have passed.
As for the quality of the lumber and other materials: housing built in a hurry in eras of high demand for new housing tend to have low-quality materials because the good quality materials were already spoken for. For example, the lumber used in some homes from the late 1920s is low quality.
The same is true of housing built right after the end of World War II, when the materials available to non-war-related construction were of lower quality as the higher quality materials had been directed to the massive war effort. For example, 1 X 12 fir roof planking with fist-sized loose knots that fell out, etc.
As a general rule, however, materials and hardware were higher quality decades ago, and in many cases are no longer readily available, for example, 3/4-inch thick clear (i.e. no knots) redwood tongue-and-groove boards, straight vertical grain fir flooring, and so on. Lumber is graded by a number of quality factors at the mill, and the quality of the grades has (in my experience) declined. Construction grade, Number 2 or better, Number 1 or better, select structural--all have increased in cost while the quality has generally declined. There are exceptions, of course, but these are exceptions, not the general rule.
To save time, carpenters now use nail guns. "Sinker" nail-gun nails pull out far more easily than galvanized nails hammered by hand. Shear walls (plywood nailed to studding for structural strength) nailed off with galvanized nails are stronger than shear walls nailed off with "sinker" gun-nails. The list of reduced quality / reduced durability materials and hardware is long: particle board and OSB (oriented-strand board) have replaced plywood, oil-based paints have been replaced by water-based paints, but the oil-based paints have far more durability, and so on.
So how much durability and future maintenance are we buying when we buy a condo or house? Appraisers have devised terms/categories to describe impairments of value and utility:
End of service life describes when the structure's systems are reaching the age when they typically need to be replaced. For example, a 25-year old composition (asphalt shingle) roof is considered to be at the end of its service life and will soon need to be replaced, even if it isn't leaking (yet).
Functional obsolescence describes structures and systems that still work but have depreciated due to outdated design, inefficiency or poor condition.
External obsolescence describes impairments that aren't intrinsic to the structure itself but are the result of external factors such as environmental, social, or economic forces. The crystal meth-house next door, for example, or the "100-year floods" that now occur every 4 or 5 years.
Economic life refers to the time a property can be used profitably, which may be less than its physical life. For example, a mall may still be physically intact, but its economic life has ended due to changes in the economy.
We tend to assume any structure can be repurposed or converted to another use, but this isn't always the case. A mall, for example, is a big lightly constructed box. A buddy and I once installed 12-foot sheets of Type-X (fire-resistant) drywall in a mall bay. (Getting the very heavy 12-foot sheets up on the scaffolding and screwed to the studs was no mean feat.) I realized the mall was little more than tall steel studs and steel roof beams--a shell.
It's not clear what "savings" would accrue from trying to re-use this shell stuck in the middle of a vast asphalt parking lot.
Much hope-hype is being spun around the idea of converting mostly-empty office buildings into residential apartments / condos. This isn't as easy as it might seem. An office building floor might have two bathrooms and a utility sink, where a floor converted to residential must have many bathrooms and kitchens, all of which require plumbing and electrical service chases (spaces to run wiring, conduit, plumbing pipes, etc.). The existing windows and structural posts may not lend themselves to residential layouts. The cost of all this is intrinsically high and so the units will be expensive.
On top of these issues, we have to consider what happens as extreme weather events cause insurance rates to skyrocket and insurance policies are dropped, issues that raise risks for lenders as well as insurers.
We might also consider the potential scarcity of craftspeople who are qualified by long and varied experience to do anything other than slap together modular pieces (trusses, prefab windows and cabinets, etc.) and the already-visible scarcity-value of their labor. In my experience, it's doubtful I could find anyone to do all the varied tasks I can get done in a day, as there are "tricks of the trade" that require actual experience, not just watching a how-to video on YouTube University, as useful as those videos may be.
For example, replacing an old towel bar in a bathroom and the new towel bar ends don't cover the old paint exposed by removing the old bar. There are ways to deal with this without having to repaint the entire bathroom, but they're less forgiving than simply replacing a towel bar.
The scarcity of experienced craftspeople reflect demographic and cultural trends. A great many craftspeople / contractors are retiring (or going to work for Home Depot, as the work is a lot less demanding), and those imagining that supply and demand will effortlessly generate replacement craftspeople aren't factoring in 1) the cultural shift to valuing digital work, speculation, social media influence, etc. and the general decline of the social status of tradecraft work, 2) the many years of experience required to do more than assemble modular components, and 3) the heavy burdens imposed in most locales on licensed contractors. It's difficult to acquire the many skills needed to fulfill all the legal, financial and regulatory requirements, and it's an inherently risky enterprise.
Americans assume there will always be someone willing and able to do whatever work they desire done if they have the money. But this assumption appears to be on increasingly shaky ground. The cost may be prohibitive, the qualified people may be scheduled out a year or two, and unqualified people may botch the work, causing additional problems.
Once the pool of experienced craftspeople / contractors is drained, it won't be refilled without major cultural / economic shifts.
We're already seeing long lead times for work that is entirely standard (replacing roofs, etc.) and major leaps in cost.
Consider the recent spate of sensationalized articles touting homes for sale in Japan for $100. (Other articles tout similar deals in rural Italy.) Those of you who have traveled via local trains in Japan and visited rural areas know that many of these homes are in depopulated, remote communities. The number of people who are willing and able to do the necessary restoration work in these areas is low. (The same can be said of abandoned houses in urban zones.) Even if some elderly carpenter is available, communicating with him and the local bureaucracy will be extremely challenging without an interpreter.
And all this assumes the house is salvageable, an assessment that demands deep knowledge of Japanese construction, taxation, etc.
Akiya houses: why Japan has nine million empty homes.
If we consider that the average age of homes in the U.S. is 40 years, and the potential for all the forms of impairment to manifest, we have to ask: what exactly are we buying when we buy a condo/house? What are the future costs and their impacts on valuations? The experiences of owners of older condos in Florida are instructive: here is an excerpt from the above-linked article.
"Ivan Rodriguez leapt at the chance to buy a unit at the Cricket Club, an exclusive bay-front condominium in North Miami. In 2019, he liquidated his 401(k) retirement account to purchase a nearly 1,500-square-foot unit with water views for $190,000.
But because of a recent state law that requires older buildings to meet certain structural safety standards, the condo board recently proposed a nearly $30 million special assessment for repairs, including roof replacement and facade waterproofing. It would amount to more than $134,000 per unit owner.
Rodriguez, 76, didn’t have the money. So he reluctantly put his two-bedroom condo up for sale, joining dozens of others in the building who are doing the same. After originally listing his unit for $350,000, he kept marking it down until finally it sold for $110,000 last month, or 42% less than what he paid for it."
It's not that difficult to imagine conditions in which the value of a condo or house reverts to zero or the value of the underlying land, which may itself be impaired if the land is no longer buildable or economically viable.
Received wisdom holds that real estate only goes up due to scarcity, and all we need to know is the Zillow estimate of current market value. But that's not the only input in future valuation. Every structure is a tangible object subject to a range of real-world impairments of its utility and economic value. Those factors may well become more consequential than the credit-bubble-valuation we currently view as "all that matters."
Highlights of the Blog
The Decay of Everyday Life 5/16/24
Precarious: One Misfortune Away from Insolvency 5/14/24
Squeezed for Decades, America's Working Class Is Finally Up Against the Wall 5/13/24
Best Thing That Happened To Me This Week
.The mountain apple tree blossoms have become small fruits that appear almost candy-like in their pale pink-green coloration.
 
What's on the Book Shelf
I'm adding a new occasional feature to the Musings Reports: what I'm reading / just finished reading, along with books readers / correspondents have mentioned as worthy. As attention spans wither and sensationalist headlines compete for our increasingly fragmented attention, reading becomes not only a pathway to knowledge but a refuge from the distractions depleting us with a thousand cuts.
I'm listing the books' Amazon pages for the comments, but of course it's best to borrow the book from the local library if that's possible.
Just finished:
What a Bee Knows: Exploring the Thoughts, Memories, and Personalities of Bees
Why America Failed: The Roots of Imperial Decline
Currently reading:
Armada: The Spanish Enterprise and England's Deliverance in 1588 (a real doorstop at 545 pages plus 150 pages of footnotes, index, etc.)
From Left Field
NOTE TO NEW READERS: This list is not comprised of articles I agree with or that I judge to be correct or of the highest quality. It is representative of the content I find interesting as reflections of the current zeitgeist. The list is intended to be perused with an open, critical, occasionally amused mind.
Many links are behind paywalls. Most paywalled sites allow a few free articles per month if you register. It's the New Normal.
‘We deserve more’: US workers’ share of the pie dwindles: Bureau of Labor Statistics releases latest estimate of how much labor receives of national income, showing bleak decline
Return to Dust (Chinese film)
Why Japan's in Trouble with Female Hikikomori (6 min) 1172 comments
Post-Acute COVID-19 Joint Pain and New Onset of Rheumatic Musculoskeletal Diseases: A Systematic Review
Dr. Shiva Reads Chapter 2 From "The System & Revolution." (15 min)(via Royce M.)
AI Copilots Are Changing How Coding Is Taught Professors are shifting away from syntax and emphasizing higher-level skills (via Richard M.)
Gen Z Sinks Deeper Into Debt: Inflation drives many to credit cards to cover costs, leaving them with bigger balances.
Olive oil use associated with lower risk of dying from dementia: An observational study has found that regular olive oil consumption may have cognitive health benefits.
High levels of ultra-processed foods linked with early death, brain issues: Such foods encompass a broad category, including cookies, doughnuts, potato chips, hot dogs, white bread and frozen meals (via Cheryl A.)
East Asia’s Coming Population Collapse And How It Will Reshape World Politics
What is a friendship marriage? From pals to platonic partners, Japanese couples embrace unions without romance or sex (via Cheryl A.)
The Top 10% Are The Main Beneficiaries Of Globalization
"The physician is only nature's assistant." Galen
Thanks for reading--
charles |
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