The Future of Real Estate – Part 2 (The Solution)

In my last post, I detailed the problem with real estate – it’s too expensive.

People have been trained to want to buy real estate without understanding what makes a good real estate investment.  The system in place allows us to amplify those bad decisions by spending 5x more than we were able to save, effectively spending the next 20 years paying it back.  Because it fit into our monthly budget, we were never overly concerned with the cost.  The market has now figured that out and in many major cities, is testing our upper threshold of what we’re willing to pay.  When you test that upper limit of what people are willing to do, they start thinking outside the box.

The best recent example, which I had mentioned in the last post is how high oil prices gave rise to an environment in which Tesla could be successful.  So the fun question that we get to answer here is what high real estate prices are creating. Prices have reached a point where all kinds of businesses are coming out of the wood work with ‘alternative housing’ ideas.  Most of it is in its early stages now, but we have some very cool options in the pipeline.

3D printed homes.  If you don’t know what I’m talking about, do a quick search.  Additive manufacturing is most likely the future of manufacturing, and I can’t see why it won’t also be the future of building homes.  If I were to guess, I’d say that the future of construction is automated and the further we progress in that direction, it’ll look like a giant 3D printer.  While they’re not ready for the market yet, I’d be surprised if we didn’t see some market ready options within 10 years.

Shipping container homes.  Shipping containers are relatively inexpensive, structurally sound, and made from recycled materials.  They also apparently double as pretty cool homes.  The genius in this approach is that we’ve figured out we can build a modern, livable home out of just about anything.

Mobile homes.  Not trailer park mobile homes, just homes that are mobile.  One of the more interesting designs that I’ve seen was of micro suites which could easily be moved from building to building.  For individuals who like to move around, their suite would just move with them from city to city.  For others mobile homes are about getting off the grid.  One of the coolest ideas in the pipeline are self-sustaining, modern, smart, mobile homes.  Everything from solar panels to water filtration would be built into the home itself, allowing for you to put your home down on any piece of land you’d like.

Modular homes.  While 3D printed homes certainly don’t qualify, almost every other new style of alternative housing falls under the category of modular (including container and mobile homes).  Modular homes are such a broad category because it’s really referencing the production process rather than the final product.  With modular homes, each section of your home is manufactured centrally, then shipped out to your location to be installed.  That’s a big deal.

Right now, an average home is built like a Rolls Royce: with hand tools and a 6 month wait-time.  What we need is an effective assembly line for homes and that’s what modular housing is looking to tackle.  By building in modules, fabrication can be done centrally and then shipped out to the buyer for installation.  That central, and streamlined fabrication process means that a home can be built in a couple weeks and with far fewer resources.  We’re quite possibly looking at a genuine disruption in how homes are constructed, especially when the build time and cost are a fraction of our current options.

What about the land though?  Real estate is always a two part conversation because land is pretty useless without a house to put on it and a house is pretty useless without land it put it on.  It’s very possible that as houses become less and less expensive to build, people are just going to charge more for land, effectively providing the same end price.  Again, this is what happens when we understand the price of something but not its value.  That’s ok though, because I see a solution on the horizon for the cost of land as well.

Land is not unlimited, but we are not even close to using up what we have.  What’s really limited is land near urban centers.  Urban centers tend to have the most desirable jobs so people move to the city.  There’s more people who want to live there than land available so demand exceeds supply and the price goes up.  The solution thus far has been densification – finding ways to put more people in the same area and large residential towers are the result.  The problem with densification is that the city’s infrastructure rarely keeps up and we simply end up with congestion.  Yes you get to live in the city, but good luck getting around and doing things.

There’s more than one way to solve this problem though.  Rather than trying to accommodate more people in the city, why not motivate them to leave the city?

The first way you do that is by making the commute more tolerable and I think driverless cars are going to help that in a big way.  For most people, driverless cars are likely to cut down on commuting times significantly.  Second, commuting takes on an entirely different meaning when you’re not driving.  What we think of as a 2 hour commute today, could very easily become an hour in your mobile office a decade from now.  Some will still prefer to be within walking distance of their job.  For others, a cool modular home, on a quiet lake just outside of town for a fraction of the price will be the more attractive option.

The other way to get people to leave the city is by providing job opportunities outside the city.  It was the industrial revolution which created this population shift, but it was really the evolution of technology.  Farming techniques had evolved to the point where fewer farmers were needed, just as factories were being introduced and manufacturing jobs in the cities were booming.  If I were to guess, it will be technology which brings people back out to the country – and I’m thinking it’s going to be telecommuting.  Telecommuting is basically working from home, but with the power of the internet and the way the job market has evolved, it’s becoming more and more feasible.  Perhaps one of the biggest transitions will be when coding becomes a primary trade.

When I think of successes like Uber and AirBnB, I see a trend of decentralization.  It’s taking a look at the resources we already have access to and simply using them more efficiently.  My biggest issue with real estate is that it represents a remarkable inefficiency.  We have more than enough land to share, but we’re willing to commit decades of our income to securing a small piece.  Every dollar that we spend on a house is a dollar we don’t spend on all the other things our economy produces, yet we’re encouraged to spend 5x more than what we’re able to save.  And without understanding these dynamics, we haven’t been motivated to challenge the status quo – until now.

The Future of Real Estate – Part 1 (The Problem)

 

Real Estate has long since been a frustration for me. Growing up, I heard the same thing that everyone else did… You should own your home because if you lose everything, at least you’ll have your home.  Paying a mortgage is better than paying rent because it’s pretty much like paying yourself instead of paying someone else.  Real estate is a safe investment because everyone needs a place to live.

As I developed my investment skillset, my perspective on real estate began to shift.  Not only did I lack any emotional attachment to owning my own home, Now I also had a much clearer understanding for how real estate behaved as an asset within its markets.  What I’ve also realized is the unfortunate reality that while your average real estate professional is aware of these dynamics, they don’t entirely understand them, and will only mention them when it helps to close a sale.  If a market is overpriced, you’re more likely to hear your realtor tell you that you’ll make your money back eventually, than to wait for prices to come down.

While we’re going to dive into what the real issues around real estate are and how I think they could be solved, I think it’s important to mention that my perspective on real estate has been shaped by growing up in a city which became one of the world’s hottest real estate markets.  While I have the funds necessary to own my own home, I do not.  It’s frustrating because I’d like to, but my understanding of the dynamics at work prevent me from making that decision.  While I’m confident in my patience, paying rent is still far from ideal.

There are several issues with real estate, and I think they all start to come undone quite nicely when we start asking why real estate is so expensive.  Consider this, if we didn’t have the option to borrow hundreds of thousands of dollars that would take us decades to pay off, how much would a home cost?  What if we could only spend what we had saved up?

The problem with a mortgage is that it inflates purchasing power.  If you saved 100K, you can now go spend 500k on a house.  Saved 200k, go spend a million.  The lenders know how hard it was for you to save that first 20% as well, which is why they’ll give you between 20 and 30 years to pay it off the last 80%.  Yes you’ll have a place to live, you’ll spend most of your working life paying it off.  Am I the only one who thinks this sounds like financial slavery? If we all simply said no, I won’t take on a debt which will take 20+ years to pay off, we’ve set the terms on what we’re willing to pay.  They can only sell at the price at which we’re willing to pay.  Unfortunately we haven’t figured that out yet and we’re too used to the upper threshold of what we can afford to pay.

So what is a home worth?  Not price but value.  Price is what you pay, value is what you get.  Well traditionally, there’s 2 parts.  First you buy the land, then you build a house on it.  We often find land to be expensive, but why?  If I were to buy a business that produced widgets, it would have value because I could take those widgets to market and sell them.  If I bought a farm, it would have value because I could take the crops to market and sell them.  If I owned a plot of land, which did nothing, would it have value? Well it would be worth whatever someone was willing to pay me for it right?  If the land carries no inherent value, why would someone pay me for it?

In effect, what we’re really paying for when we buy land is a reduced travel time between home and work.  With a limited supply of land within the city center and a seemingly unlimited demand of people who want to live there, the markets set the current price.

The second piece of this puzzle is the cost of building an actual house.  Right now, an average house takes about 6 months to because it’s treated like an individual project, and done primarily with manual labour and hand tools.  Sounds like the timeline and process for a Rolls Royce.

So this is where I leave you hanging.  We’re keen on city centers now, but will that always be the case?  And what happens when we can start building houses like we currently build cars?  Well that’s not going to happen… is it?  The real question is why it hasn’t happened already.  Here’s my final thought:  When oil prices were low, nobody cared about electric cars.  When oil prices were high, electric vehicles became a more realistic alternative.  When oil prices peaked, Tesla walked into a market waiting with open arms.  High oil prices delivered Tesla.

What will high real estate prices deliver?

 

Fuck the Rules.

Think about the last time you were driving.  How fast were you going?  Was it at or below the posted speed limit?  If you were like me, you were going with the flow of traffic which is usually about 20% over.  Despite a blatant disregard for the law, millions of commuters get to and from work every day without any intervention from law enforcement.  Why?

Natural order supersedes civil law.  People are driven to pursue efficiency and it’s usually achieved through a group effort.  Collectively, we decided that the speed limit was too low and that we could safely operate our vehicles beyond that range.  Since we’ve done it collectively, and have demonstrated its success, law enforcement has conceded this victory and have effectively decided to focus their efforts elsewhere.  I find it curious that the laws have not changed to reflect this, especially considering that cars have become far more agile and much safer since current speed limits were introduced.  Perhaps they’ve assumed that if they increased the limit to what we actually drove, people would simply drive 20% above that and it would be chaos.  Maybe.  Maybe we find that natural balance between speed and risk on our own.

Another perspective, well known by the tinfoil hats, suggests that this is done on purpose as it gives a government direct control over its population anytime it’s deemed to be necessary.  If a cop wanted to pull you over, he could start with the fact that you were probably speeding.  If you were driving the limit while everyone else was speeding, well now he’ll pull you over for acting suspicious.  A well-known lawyer wrote a book about the idea that the average American professional broke several federal laws each day.  This wasn’t because of a lack of morals, ethics, or competency, but because the rules, laws, and regulations were so numerous, broad or vague, that it was nearly impossible to do your job without breaking some set of rules.

While I think government and law enforcement largely recognize the system and understand how to exploit it, I don’t think it was purpose-built nor do I think most governments work with the goal of exploiting their people. If you think about why rules are put in place, it’s usually to retain power or to promote efficiency.  When a king decided that only his bloodline would rule, this helped to protect his power.  When slave owners decided that slaves didn’t have rights, this was to protect their power.  When men decided that women shouldn’t be allowed to vote, it was to protect their power.  While it still does happen, I suspect that it’s becoming increasingly difficult to introduce laws for the purpose of retaining power.  If I’m not mistaken, those types of laws rely on a lack of access to information and the internet seems to have undermined that quite nicely.

What about speeding though?  That law doesn’t do much in the way of consolidating power in any direction does it?  Of course not… I don’t think.  That’s a law designed to promote efficiency.  The idea is that we want to maintain a healthy flow of traffic, with as few accidents and injuries as possible.  Not difficult to understand and most would agree that it’ a sensible solution – so why does almost everyone break that limit?  Well as it happens, we’re capable of finding that equilibrium on our own.  Once upon a time, when cars were heavier and couldn’t stop as fast, back when they weren’t loaded up with airbags, back when there weren’t seatbelts, those speed limits may have represented that equilibrium – but we’ve since evolved.

We actually have our own criteria for setting a speed limit.  We want to get from point A to point B in the least amount of time possible, without causing an accident, and without being pulled over by law enforcement.  As it turns out, we’ve identified that this new equilibrium is usually about 20% over the posted limit, and it’s why so many of us get frustrated when we’re being obstructed with someone who is only going the limit or just below.

So rules are good as long as they’re promoting efficiency then right?  No murdering is a good rule because it decreases our population’s mortality rate, time spent thinking about being murdered, and resources spent not getting murdered.  Net result is more people with more time to think about things besides being murdered – makes sense.  Consider this though, if murder wasn’t against the law, would you?  For those that have, was the law an effective deterrent?  For those who it did deter, would they have done it had they known they wouldn’t get caught?  What I’m getting at is that the law isn’t driving our sense of right and wrong, that’s something you find on the inside.

So we have these internal drivers that help us pursue efficiency and internal drivers that help us understand right from wrong.  I think they overlap and when I’ve refined this idea, it’ll certainly be its own blog post.  Until then, follow me on the assumption that our concept of right and wrong is based on our understanding of efficiency.  It’s why speeding doesn’t feel unethical unless you’re creating a dangerous situation for others.

So back to murder.  It’s a concept which is almost universally understood to be unethical or immoral. Why is that?  Well there’s an emotional perspective, an intellectual perspective, and a societal perspective that most of you will already be familiar with, but here’s my perspective from the side of efficiency.  I don’t think murder is inherently right or wrong.  If you were given a chance to assassinate Hitler prior to the holocaust, would you?  Someone who did would likely be considered a hero.  Someone who refused may even be considered to be immoral by the masses.  But what if you were only given an opportunity to kill him prior to him doing any harm?  What if you were given an opportunity to murder Hitler as an infant? Quite the ethical conundrum.

From the perspective of efficiency though, I don’t think it’s that simple.  The most efficient approach would likely be some level of early stage intervention.  I know I’m probably one of the few to suggest this, but imagine if Hitler’s passion, intelligence, and charisma were better channeled?  Not only would we have avoided a second world war, Hitler was probably capable of making a very positive contribution given the right circumstances.  All that said, in a universe of infinite possibilities, there are bound to be scenarios where murder is the most efficient option.  Where I’m sitting on this currently, is that while murder can be ethical or the most efficient course of action, it rarely ever is.  How many of us have the wisdom necessary to know which lives are worth keeping and which aren’t. How many of us would you think are entirely incapable of making a positive impact on the world when surrounded by the right people?  I think the answer is barely any and I think those are probably the biggest reasons why this exists as a social rule, regardless of law.

Finally, the fun part.  I was trying to come up with a law that was already in place, which embodied efficiency.  I couldn’t.  Then the lightbulb went off.  I suspect efficiency is like an exponential curve, meaning that you can always become more efficient, but in most cases you can never become completely efficient.  Effectively, there’s *always* room for improvement.  The purpose of a rule, is to dictate behaviour.  That rule may dictate how to behave in a highly efficient manner today, but what happens when our behaviour evolves beyond that construct?

The more rules we take away, the more we’re allowed to be ourselves.  The more we’re allowed to be ourselves, the better we can understand our maximum utility and the value of others.  The better we understand each other and ourselves, the better we are at working together towards a common goal.  The better we work together towards a common goal, the more efficient we all become.

Best laws ever ‘put’ in place? Allowing people to govern themselves.  Allowing slaves to be people.  Allowing women to be equal.  When you remove laws and regulations, allowing us to be what we should be, amazing things happen.