Landmark Links October 20th – Hazard Pay

Hazard Pay

Lead Story…. A little more than a month ago, I wrote a blog post called Send Help that detailed how damage caused by natural disasters in general and the hurricanes that hit Texas and Florida this fall in particular was going to further exacerbate the labor shortage and drive the cost of home construction higher.  Fast forward a few short weeks and another major natural disaster has struck – this time in the form of raging wild fires that leveled much of California’s wine region in Napa and Sonoma.  Given current tight conditions with regards to both labor shortages and rising commodity prices, the construction industry is already hobbled and ill-equipped to deal with normal volume let alone the deluge that we are beginning to see as large portions of Houston, Florida and now northern California seek to rebuild.  CNBC’s Diana Olick attempted to quantify just how dire the situation is in a recent post entitled (emphasis mine):

The exact tally is still impossible to calculate, but at least 10,000 homes and other structures have been destroyed by floods, winds and fires in the past three months. Given the acute construction labor shortage that was already at play before these disasters, reconstruction and its repercussions in residential real estate could pose yet another disaster.

“The housing market can’t take the shock of a natural event,” said Nela Richardson, chief economist at real estate company Redfin. “It can’t take any shock because we are so tightly wound with inventory. Any change is a big change, and you’ll see that play out across the South.”

The inventory of available homes for sale is acutely low across the nation and continues to fall, down 6.5 percent in August annually, according to the National Association of Realtors. As a result, home sales dropped for the past three months, and entry-level buyers are stepping aside. Supply remains leanest at the lowest end of the market.

With little relief in sight, the National Association of Home Builders has begun to lobby Washington for something desperately needed: a guest worker program to help fill some of the demand for construction workers.  However, anyone who follows politics at a casual level should recognize that getting that accomplished in today’s toxic environment is a long shot at best, positive economic impacts be damned.  More from CNBC (emphasis mine):

“A successful guest worker program will help alleviate the current labor shortage in the residential construction sector, quicken the rebuilding efforts in Texas and support the overall economic growth of this nation,” wrote NAHB Chairman Granger MacDonald in a September statement.

In California, the devastation from multiple wildfires still cannot be quantified, but it is already beyond imagination. Thousands of homes will have to be rebuilt from the charred ground up. That will take every available worker in the state and beyond.

“All the resources are being drained to the rebuilding effort,” Redfin’s Richardson said. “That is going to increase the cost of housing and renovation across the nation.”

As I’ve gotten back to work over the past couple of weeks, I have spoken with clients about the Napa and Sonoma fires and what impact that they could have in the local and regional housing market.  Two main takeaways are below:

  1. New Demand, Less Supply: The fires aren’t even out yet and I’m already hearing rumblings that demand for for-sale housing that is still standing in that region is off the charts.  This is consistent with the Houston market where demand (and prices) shot up for anything on high ground after Hurricane Harvey hit.  However, there is a critical difference here: much of the destruction in Napa and Sonoma hit million dollar plus luxury homes.  So far I’ve heard anecdotal evidence of wealthy cash buyers just looking for a place to live regardless of price with the assumption that they will sell once their rebuild is complete (h/t Jeff Condon).  Add this to the fact that there is limited inventory in the region to begin with and relatively little new construction and it’s a recipe for surging values.  The lower end is even worse with displaced residents desperate to find a place to rent anywhere near home and sometimes cramming more than one family into a small apartment due to lack of available space.  This is not a market like Houston where production can ramp up in short order when demand warrants.  In fact, there were only about 1.5 months of supply before the fires hit and displacement will only put downward pressure on this number.  It’s probably a good time to be a builder or developer in Napa and Sonoma if you will be delivering units soon assuming that they weren’t destroyed by the fires.
  2. Labor Vacuum: I spoke with a client earlier this week who had an interesting take on the coming rebuild in Napa.  The aforementioned wealthy home owners who lost their homes are likely going to care less about the cost of rebuilding a home than they will about getting their home rebuilt.  This is very different from the mentality of production builders who account for much of the construction employment in California.  There is a potential scenario whereby the massive number of custom home rebuilds in Napa and Sonoma siphon off a lot of labor from production builders since the pay will likely be better and projects will not have the same profitability constraints – someone rebuilding their personal residence does not need to account for builder profit like a production builder would (h/t Tad Springer).  Unfortunately this has become a zero sum game since there appears to be no ability to draw more domestic workers into the construction labor pool and no desire to loosen up border restrictions to attract international workers.

These natural disasters have been incredibly tragic.  Many people lost there homes and some lost their lives.  Unfortunately, the tragedy is likely to continue once the fires are finally put out as the already tight housing market feels even more pressure.


Daily Reminder: The reason that poor people can’t move to more productive cities for better jobs is 100% a housing affordability story brought about by restrictive zoning.

Policy Bubble? Warren Buffet made a large bet on  fossil fuels and human-driven trucks when he bought a controlling stake in the Pilot Flying J truck stop chain.  This was also essentially a bet against electric cars and self driving vehicles despite predictions of their coming dominance.  What does the Oracle of Omaha know that we don’t?

Workaholics: Great piece from JBREC about how the term “prime working years” is being re-defined by Boomers who refuse to or can’t retire.


Don’t Call it a Comeback: The suburban office market suddenly has a pulse again.

Reaching for Yield: Private Equity Fund KKR has raised a $1.1 billion fund that targets investments in the riskiest slice of commercial mortgage-backed securities at a time when many others are trying to reduce risk.


Different Approach: A new lender is providing a service to help mortgage borrowers crowdfund their down paymentsSee Also: Millennials’ new weapon in bidding wars – mom and dad’s home equity.  And: Meet the NY developer who is now allowing people to purchase condos with Bitcoin.


Looming Shortage: Lithium is the metal that powers modern batteries critical to so many technological advances.  There is plenty of it in the ground but not nearly enough mines to extract it.

Shrinking Customer Base: TGI Friday’s is getting killed as the middle class continues to struggle.

Moment of Truth: Tesla CEO Elon Musk is a brilliant visionary but massive shortfalls in vehicle delivery is going to invite more scrutiny from investors.

Chart of the Day

This explains a lot: Discretionary service spending is improving much slower than during the previous cycles.


Please Make it Stop: Business Insider provided this somewhat hysterical list of 16 Halloween costumes that are most likely to trigger your favorite Millennial.

Totally Worth It: A woman traded a packed of McDonalds limited edition Szechuan Sauce for a car with an idiot who didn’t realize that you could buy the same processed garbage in a grocery store, because apparently the gene pool is badly in need of cleansing.

There’s A Sucker Born Every Minute Part I: Someone bought a pair of Adolf Hitler’s underwear for $6,600.

There’s A Sucker Born Every Minute Part II: Rapper B.o.B. created a GoFundMe page in order to send a satellite into space to prove that the earth is flat.  Seriously.

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Landmark Links October 20th – Hazard Pay

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