New Construction Falls to 5-Year Low as Price Floor Nears

Dave:
Buyers, sellers, renters, and landlords all say the numbers are getting harder to make it work. Affordability is just strained. In New York, flippers are facing shrinking margins and a proposed new tax. Meanwhile, fewer housing starts could strengthen apartment rents by 2027 and senior housing occupancy continues to climb. I’m Dave Meyer here with Kathy Fettke, Henry Washington, and James Dainard. To break down all the headlines you need to know, this is On the Market. Let’s dive in. Kathy, we’re going to call you up first. What do you got for us today?

Kathy:
All right. Well, this article is actually from CRE Daily, so it’s going to have a commercial real estate focus, but I think
It applies to home owners, home buyers, because a lot of commercial real estate looks at residential first to see if there’s enough roofs. They want to make sure there’s enough roofs for their commercial project. Anyway, the headline is US Housing Starts Slow Giving Apartments Room to Recover. So the story is basically that US housing starts fell to an annualized 1.18 million units in May, and that is the lowest reading since April of 2020. Single family completions are also declined 16% year over year. Again, the lowest level since 2020. So builders are not building, they’re not able to sell like they would like to, especially with interest rates having gone up over the last few months and they’re slowing down. So this article is basically saying this is going to help multifamily because multifamily, as you guys know, overbuilt over the last few years, and they’re still working through that excess supply.
So this article is basically saying this is going to be good for landlords because there’s going to be less supply. What it’s not good for is the renter. It’s for people. For people. Yeah. But from an investor perspective, less supply, more demand, rents go up, home prices go up. That’s basically what this article is saying.

Dave:
Yeah. I mean, it’s frustrating in my opinion how much construction has wavered. It felt like we were just getting back to a good pace of construction towards the end of COVID. And now to see it go back in the other direction, it stinks because we have this housing shortage in the United States and we need to be building affordable single family homes.That’s where the demand is. I think that’s what’s been tough about the market talking about commercials. We’re building tons of multifamily, but people still want to live in single family homes and we’re not building enough of them. And so there’s this mismatch between supply and demand in the market, which is creating some of the problems that we’re seeing. But at the end of the day, you can’t blame them, right? It’s tough to build right now. It is not profitable. They’re

Kathy:
Not in the charity business. They’re not doing it for fun.

James:
People aren’t making money. You got to motivate people to run a business to build housing. I know up in the Pacific Northwest, builders are not doing great. They’re getting beat up because pricings came down on the backside, costs have gone through the roof, and their borrowing cost is higher. The time to sell is a lot higher. These things erode the profit down to where a lot of people are writing checks to get rid of properties. So there’s no motivation to build these units. And so they got to do something different because building start permits nationwide are down everywhere. There’s no money to be made. You got to make money and no one’s making it.

Dave:
And they’re sitting on a huge amount of inventory. The months of supply for new homes right now is above 10 months.That is high. Briefly in COVID it was that high, but it hasn’t been that high since 2008. They’re sitting on a lot of inventory. Why would you build more when you can’t move anything off your shelves?

Henry:
I mean, I feel this personally because I have a lot that I was planning to build a house on, but the values of the homes have not gone up enough for me to want to deal with now building the house. In other words, my profitability is shrinking because the ARVs are coming down a little bit. And so it doesn’t make sense for me to finish this build.

Dave:
ARVs are coming down and construction costs are going up. So margins are just getting compressed.

Henry:
I’m doing the math. And remind you, I’ve never done this before. So the people who I see who are actually still making money building new construction, they are experienced. So they’ve got their cost per square foot dialed in and they’re in more affordable markets where home prices aren’t extremely high, but rents are pretty good. But those are niche markets across the country. As a whole, it’s just too hard. And so for me, I look at my profitability. I was projecting when I first started was somewhere between 50 and $70,000, which was enough for me to give it a try. But now I’m hovering somewhere between 25 and $50,000 and I can sell a lot. I can just sell the lot for 20. So why would I do it?

Dave:
Love the do nothing and make the same amount of money approach. It’s a time-tested

Henry:
Winner.

Kathy:
Amen. We have a lot in Malibu that we bought years and years ago because we didn’t want anyone to build to ruin our view. But then we moved, so we’re stuck with this lot. And I’ve been looking at all the cheapest ways to build it out. I’m looking at manufactured housing. What can I do to make this pencil? And it’s just not. It’s just not. As far as a spec. If somebody wanted

Dave:
To build

Kathy:
It and live in it, fine. But for me to build it and try to sell it for any kind of profit, no, it’s not.

Dave:
You nailed it, Kathy. The only people who can build right now are people who aren’t looking at it as an investment, who are looking at it as investment in your life and your lifestyle, which is fine, but not like, “Hey, I’m going to build this as part of a business.” That doesn’t make any sense.

James:
No, and developers and investors get called bad guys from a lot of different types of politics, and they use it for elections and all the. People are going to come back to builders and go like, “Can you please start building stuff again?” Because there is nobody. We sell a lot of dirt in Seattle. I don’t know a lot of people buying. I’m buying houses for 25% cheaper than the lot price, and builders still won’t want to buy it.

Dave:
That’s crazy.

James:
It’s like, because there’s just no margin. Way too much barrier entry, way too expensive, way too many headaches. Why would you want to do that? It’s the worst sales pitch to start a business of all time.

Dave:
Your

James:
Upside’s

Dave:
Tiny and your risk is huge. Does this sound huge?

Kathy:
It’s tough. I mean, as you guys know, we have retail subdivisions all over the country, and it’s very interesting to look at it like our one hour north of Tampa, but kind of inland. There’s a lot of growth happening there. Those are still flying off the shelf. It’s incredible. Then we’ve got our Bozeman Montana one, just been steady, steady, just regular sales. And then the most recent one we did in Oregon, just sitting. Eight homes built. Yeah, it’s crazy. We lower the price. It’s tough. It is tough out there depending on the market you’re in, obviously.

Dave:
I think the takeaway for an investor, at least for me, is that this puts a floor on the single family correction that we’re in, at least in my mind. The fact that fewer new homes are going to be hitting the market in the next few years limits how much home prices could fall or could help them start growing again in certain areas because this is competition for existing homes. And I think a lot of times right now, actually for sure right now, the median new home price is lower than the median existing home price. So new construction has been undercutting existing homes for a while. And so if we see that backlog clear out, it should help us find some more footing. Now, single-family homes are still up one, 2% year over year. It’s less than the pace of inflation. And so I think this just continues to show that even though the market is slow and weird, it’s probably not going to get much worse than it is right now unless we see massive unemployment is the one caveat to that.
But there’s no evidence that’s happening right now either.

Kathy:
I think also being in development and knowing that these projects can take 10 years, they take forever if they’re large. You just don’t want to take that kind of risk if it looks like the population is growth is slowing. It’s something to think about. Is this just a now problem? And we don’t want to encourage too many builders to go in and build because then there’ll be a bigger problem later when there’s too much supply.

Dave:
Totally. Yeah. We did do a show on this. If we keep building at historical levels, we might have a glut of supply, not in the next few years, but 10 years from now potentially. I think that’s a really good point, Kathy, and something that stinks for the next 10 years. But eventually when you look at the math, it just makes sense. If you look at how many boomers own real estate, it’s so many. It has to go somewhere in the next 10 years. I’m not a big silver tsunami person. I don’t think that means there’s going to be a crash. But I do think that the balance between supply and demand will even out over the next couple years, especially if immigration stays as low as it is right now. We have low population growth, both because of a declining birth rate and historically low immigration.
And yeah, Kathy, I think you’re right. That’s a topic for a whole other time, but a really good point.

Henry:
Yeah.

Dave:
Well, thank you, Kathy. It’s a really important story and great conversation here. Henry, you’re up next. I think you got something related to this, but we have to take a quick break. We’ll be right back. Welcome back to On the Market. I’m here with James, Henry, and Kathy going over the latest headlines. Henry, you’re up next. What do you got?

Henry:
All right. I have an article from AEI Housing Center, and this article is titled The Capital Gains Tax Trap: The 29-Year-old Tax Law That’s Quietly Strangling the Housing Supply. So what this article is essentially saying is that Congress set the capital gains tax exclusion for primary home sales to 250,000 for singles and 500,000 for married couples in 1997. And it hasn’t been adjusted once in the 29 years since. And previously you were mentioning with Kathy that so many baby boomers own homes. Well, because so many baby boomers do own homes and they bought them so long ago and housing prices have gone up tremendously, sometimes tripled and quadrupled in value that there are millions of boomers who own homes that if they sold now would be over the 250,000 for singles. And a lot of them would be over the 500,000 for married couples, which would trigger tax bills.
This article’s saying of anywhere between tens of thousands and hundreds of thousands of dollars. And that is keeping them from selling because they don’t want to pay those taxes above the capital gains tax. So that means those houses don’t enter the market. And as the baby boomers are obviously aging, they’re predicting this may have some substantial impact on housing supply.

Dave:
Let me guess, a boomer wrote this.

Henry:
Probably did.

Kathy:
Yeah, but yes, but you have to keep in mind that that isn’t adjusted for inflation. So they didn’t really make that money. They have to pay tax on inflation, basically. It’s not fair.

Dave:
Oh, I don’t know. It’s not fair. I pay taxes when I sell a stock. I pay taxes when I buy something at the store. I personally think this is such a champagne problem. Oh my God. It means it’s a champagne problem. $600,000 and I don’t want to pay tax on the $100,000. No one wants to pay taxes, grow up.

Kathy:
Yeah. But for many people, that’s the only wealth they have. You’re coming from an investor perspective. But I will tell you from a personal situation that my mother was left with nothing but her home. That is what she had to live on. And she was living much longer than my dad. And so we as a family had her sell her family home and she lived off of that money and rented somewhere else. It basically kept her alive for decades. So we’re not talking about people that are listening to this show. These are people who that’s all they have is the equity in their home.

Dave:
I get that, but them’s the rules.

Henry:
I want to give some numbers, Dave, for the article. I’m not saying I agree or disagree with you, but I want to put the perspective around for people. So the article says, consider California or the Pacific Northwest, New York, or Massachusetts. A couple who bought in San Jose in 2000 for $350,000. They’re sitting on a home now that’s worth 1.5 million. So that’s a gain of 1.15 million. So if they can exclude the 500,000, that’s great. They don’t have to pay taxes on that, but they owe capital gains taxes on $650,000. So at the 20% federal rate plus the 3.8% investment income tax for higher earners, that’s over $150,000 in federal taxes that they have to pay. That’s a lot of money.

James:
Really a lot of money.

Dave:
That’s still lower than someone making a hundred grand a year pays on their federal income tax as a rate. I hate the tax exclusions. I think these kinds of things just don’t make sense to me. We’re all in real estate, so we’re like, oh yeah, they should get a tax break. I don’t like taxes either. I don’t like paying taxes.

Henry:
But that’s not the point of the article, right?

Dave:
What

Henry:
Is? The point of the article is that they still feel like they don’t want to pay the taxes, which means is it going to affect the housing market? Are there going to be less inventory?

Dave:
Henry, I would sell half my stock today if I didn’t have to pay taxes on it. So what do you want to do? Free up my stock? It’s the same question. I don’t know. It doesn’t make sense to me. I don’t think this is the reason people aren’t selling their homes. I think this is just a champagne problem where people who have tons of money are complaining about paying taxes. I’m not saying I want higher taxes. I don’t like taxes either. I just think this is like. People just say this because everyone wants their own personalized tax break.

Henry:
So Dave went off so early in this article, I didn’t have a chance to make my point. But one of my favorite things on the planet is Dave on his high horse. It makes me so mad.
I love aggravated Dave when he’s arguing about the subject. That is primetime television. But first, what I want to say is I don’t think this is a big deal. That was the point. Here’s why. They’re going to sell, they’re going to make the money. Exactly. You set aside that amount and you pay that amount. It’s not like they have to come out of their pocket from some magic source of money to pay it. It comes out of the proceeds. Does it suck? Yes, but they will have the money to pay it. So I actually don’t think this will cause people not to sell. I think they’re trying to get someone to make a change so they can keep more money. Now, if this was a situation where they had to come up with $150,000 out of the blue to pay some tax bill they weren’t expecting, yeah, that might be a problem.
But this just comes from your proceeds. You just have to be disciplined enough to set it aside and pay the taxes in a few months after you’ve sold. I don’t

Kathy:
Think it’s

Henry:
A

Kathy:
Big deal. Unless they did a cash out refi. You’re going to get all upset again. I hear it coming. But if they did a cash out refi and they already took the money out and then they sell the house and they don’t have the money to pay the tax, that’s a problem.

Dave:
I understand that. But when I look at the big picture of the tax situation where most of our tax dollars already flow are to older generations. If you look at how much is made up by Social Security or Medicare, that is directly going to seniors. I just don’t know if the solution to the housing market situation, the solution to the low inventory problem is giving wealthy boomers who already get all of these advantages and get a lot of our tax dollars should get even more of that. To me, this is already probably one of, if not the greatest tax benefit in the tax code. The fact that you could own a home and sell it as a married couple, and if you have $500,000 in profit, all of that is tax-free. That’s already amazing. To me, I don’t see why we have to sweeten the deal even more than that.

James:
What I will say is I think this will affect the housing inventory though, and California is a prime example of how that works. Prop 21, right, Kathy? When people purchase in California, their taxes are locked on their purchase price. They don’t increase over time.

Kathy:
They increase a very small amount.

James:
Very small, but it doesn’t reset until they’re sold, but that locks up inventory.

Kathy:
It

James:
Does. Yeah. People do not sell in California, especially in your good neighborhoods. They keep it just because that tax role is so much cheaper. And so this could affect in nice neighborhoods, high demand areas, families that are inheriting these houses, they might not sell them. They might pull a HELOC on them instead because you do see that people are trying to, with right now, inflation, all these things, the dollar is getting stretched out. I think we all feel it on a daily basis. This might be a way that people are like, “You know what? I don’t want to give any more back.” I think it could affect the housing stock, and especially in higher median home areas.

Dave:
So what’s going to happen then? They’re just never going to sell. But if someone inherited, then they pay a tax on that. There’s always just an untax.

Kathy:
It steps up to market value, so then they don’t.

James:
Oh, yeah. I mean, they’ll trick it somewhere. I mean, even in California, they try to repeal that Prop 21 all the time where they’re trying to take away this tax benefit. I mean, at the end of the day, the state and the federal are always going to try to tax you for a new thing. I agree. But that’s just the way it is. In Washington, they pushed everyone to do EV cars, energy efficient cars. Everybody, you’re going to save money, you’re going to save money. What do they pass? A new tax against EV cars to pay for the freeways. It’s all smoking games. But I do think in good neighborhoods, established homes, and if people are looking at a big tax bill outside of their estate tax that they’re going to have to pay, they might not sell it. And it could lock things up, especially prime real estate.
I think it’s your top 5% real estate, but not 95% America.

Kathy:
I’m going to try to understand, Dave, a little bit. I’m going to not battle you. I’m going to understand you. Please. No, battle me. Okay, we had a year where we had 9% inflation. Let’s say you bought a house and that there was 9% inflation and what we went through in 2022, and then you’re selling it essentially, you’re kind of selling for the same price you paid for, but you’re paying taxes on it because of inflation.

Dave:
But you’re not. That’s not inflation. You actually made money on that. People’s home prices went up way faster than inflation over the course of COVID.

Kathy:
So I know some people have said just across the board, you remove the inflation factor and that’s the break you get across the board on stocks, houses, whatever, that you shouldn’t have to pay that. But if it were you and you were president for a day, would you remove all tax breaks?

Dave:
Yes.

Kathy:
You would?

Dave:
Yeah.

Kathy:
So just everybody just –

Dave:
Flat tax.

Kathy:
Pays their tax. Flat tax.

Dave:
Yes. Okay.

Kathy:
I was curious.

Dave:
It creates weird incentives. I agree it would be impossible to unwind in the United States at this point. It would be so difficult, but a flat tax, it just makes sense. Why wouldn’t everyone just pay the same amount?

James:
So no scale on federal either?

Dave:
No, a graduated tax, but no tax deductions. You just pay.

James:
You know what? I was going to switch my vote from Henry Washington to you when you said tax across the board, but now you say graduated. I’m out. I’m out on

Dave:
This one. No, you need a progressive tax. You can’t have everyone paying the same amount, in my opinion.

James:
You would’ve got my vote if we got taxed it. All

Dave:
Right, fine. But dude, most people would pay way lower tax if they did that.

Henry:
You’re literally arguing with a boomer about this and a super rich investor. No,

Kathy:
No. I was just curious. I do agree that it’s unfair, but that is why I invest in real estate because I look at stocks. I’m like, “I don’t want to pay all those taxes, all the gains. I’m going to invest in real estate where I can 1031. I can live in a home for two years, sell it and get that $500,000 gain that James loves that strategy so much. I could have a rental property or have a property live it at two years, rent it for three years, and still get that $500,000 gain tax-free.” So it is totally unfair, but that is why I invest in real estate. So I di’t make up the law. Same.

Dave:
No, I agree. I play by the rules. I pay all the taxes I owe, and I try and reduce them as much as possible. I totally agree with that. But this is why I just think when you have these carve-outs, everyone has a carve-out and they’re like, “Make mine a little bit better.” It’s like, okay, that’s what’s basically they’re saying is I already have this massive tax exclusion. I want mine a little bit better. Then everyone else is going to say, “I want mine a little bit better, and I want mine a little better.” Meanwhile, we have $40 trillion in debt. At some point, that needs to get addressed. You can’t just keep lowering taxes and spending money as much as we do and just assuming things are going to be fine. Oh, God. Wow. Okay. Got me riled up.

Henry:
Deep breaths, Dave. Deep breaths,

Dave:
Dave. I know. Wow. Well, hopefully I’ll be in a position to be that mad about my own having to pay taxes on my $500,000 gain on my house one day. Anyway, we got to take a quick break. We’ll be right back. Welcome back to On the Market. We got a fun episode for you today. James, you got a controversial story for us? Please.

James:
It actually has to do with taxes.

Dave:
Let’s go.

James:
Actually, I’m probably going to do this fired up as Dave about this. The article I brought in today, it’s called The Math Has Stopped Working. NYC Home Flippers Drop. As state legislators propose a new tax, they’re talking about passing a flipping tax in New York City. If you don’t pay enough tax money already, I think if you’re a high earner in New York, you’re like 52, 53% of your money goes to taxes. So now they want to add in a flip tax. And this was mind-boggling to me because I’ve actually heard these same rumors in Seattle that they’ve been talking about doing, doing a city tax or starting to tax people that buy and sell properties, which is just a terrible idea to start taxing you on the gains of your proceeds. But what the article also talks about, which is going back, this actually ties in perfectly with everybody’s articles, that there isn’t enough people flipping anymore because it’s not that motivating.
It’s too hard. It’s taking too long. The money isn’t there just like builders. They’re not properly motivated. In New York State, flipping went down 10% year over year, the amount of transactions. The gross profit went down 11% in that flipper’s ROI fell 3%. And so it’s basically margins are getting compressed, things are taking longer, and now they’re coming up with new taxes that they want to propose. And this isn’t the first time this has happened because in Pennsylvania, they passed an anti-flipping, buy and dump bill. And this is where, again, it talks about taxing again. And what’s happening is the margins are getting so compressed when you talk about adding these additional taxes on, the risk is not worth the reward. New York’s tax would end up being around 65% of the income after you’re done paying your federal, your state, and your flip tax.
So if I basically flipped a house with you adding in all these taxes, it would be like I’m walking with 35 cents on the dollar.

Kathy:
I’m going to use Dave’s philosophy here because it goes both ways, right? Yes. People want their tax benefits, and then some people want to just tax certain people more for certain things. And so right now I’m going to agree with Dave. It’s just profit.

James:
It’s just profit. This is ridiculous. You know what? No one’s going to do this. Why would anybody want to flip a house?

Henry:
I wouldn’t care if the numbers make sense.

Dave:
This is why we need a simple tax bill. It should just be a flat rate on profit regardless of what industry you’re in. We shouldn’t pick on flippers more than anyone else. The same thing, something shouldn’t be exempt. That’s my whole thing. It’s like whoever’s in power, they’re like, “Oh, we’re going to favor this industry this week, or we’re going to hate this industry this week.” And as a business person or a regular person, it’s impossible to keep up. And maybe real estate is helpful. That’s why I do real estate because I don’t want to pay more taxes either. But it’s just like your whole business could get upended because a new administration comes in and they don’t like your business and they’re going to raise your taxes for whatever reason. It’s just like the whole thing makes

James:
It so

Dave:
Complicated.

James:
Well, and the thing is, these states, so they talked about Rhode Island, it jumped from what they did is they raised their conveyance tax, which Washington did the same thing. They put it on a graduated. But basically now in Rhode Island, if you’re buying and selling, flipping, instead of paying 230 per $500 in value, it went up to $3.75. That’s a huge increase on the tax you got to pay there. These federal taxes, everything’s getting compressed and the risk is not worth it. And the thing that makes no sense is at the end of the day, what’s going to happen is that all these things pass. The flippers aren’t going to pay the tax. We’ll pay the tax.
The sellers who, Kathy, you’re talking about that need that money to live off of, they’re going to get paid less for their property. That’s just how this works. Because we’re seeing it with building right now. People’s land values in some of these metro markets have dropped 25, 35%. That was their entire retirement. Why? It’s too hard. There’s too many taxes. There’s too many things you have to pay for, and you have to build that into the spreadsheet. Those costs get paid, but they end up getting paid by these sellers that really want the highest price. So all these legislations and things they’re passing, they’re actually going against the people that they’re trying to help the most. And that’s what makes no sense. The flat tax would fix this.

Dave:
But maybe that’s not who they’re trying to help. They’re trying to lower home prices, which is exactly what they’re doing.

James:
But then they also want generational sellers and everybody to stay in their name. It’s like they want it all, but they don’t want to do anything about it. Either way, these taxes are. If my tax bracket goes up to 65% in Washington and they pass the same thing, I’m retired from flipping. I will not flip again. There’s no point. What’s going to happen is you’re going to have a bunch of inventory that’s rotting and it’s not going to come to market. It’s not going to produce housing stock, and then people can figure out how to deal with it. But at the end of the day, you have to quit beating up these investors.

Dave:
I’m with you. I mean, 65% is insane.That’s crazy. And again, not arguing for a higher tax rate. I think this is what you get in a tax system like ours that is just convoluted. You just get unfair rules. You might benefit in one area, you might lose in another area. It’s just complicated. There’s no consistency to the way we administer taxes.

Kathy:
It’s just political, you guys. That’s all it is.

Dave:
It is. All right. Well, let us know what you think. People are going to get pissed at me in the YouTube home. I can’t

Henry:
Wait. How much are going to be fire on this one?

Dave:
It’s fine. Come at me. If you made $500,000 on your primary residence and anything over 500,000, if you can’t pay 20% on that, I don’t know what to say.

James:
And here’s the thing, you don’t have to pay that tax. Just move like I do every three years. It’s a nightmare. It’s pain in the butt. There’s ways to do that. But I don’t pay the tax. Exactly. I sleep in my car sometimes. That’s the way it goes. But I don’t pay that tax. Move.

Dave:
Yeah. Have a cake and eat it too. All right. Well, that’s our episode for today. Thank you guys so much for listening to us yell at each other about taxes today. We will see you on the next episode of On the Market.