Welcome to Trust the Process podcast, where we'll pull back the curtain on new home construction,
the real estate market, and the trends shaping it all.
Discover the stories, insights, and expertise behind the process of building a new home.
Join us and let's build something great together.
Welcome back to Trust the Process podcast, where we take a behind the scenes look at
real estate, construction, and everything in between.
Thank you for joining us today.
I'm Krista, joined again by our resident expert, Michael.
And today we're going to talk about...
What are we going to talk about?
Oh, Brightspots and headwinds.
Which sounds like an 80s punk band.
It should be.
It isn't.
It shouldn't.
Right, I like it.
Yeah.
So Brightspots and headwinds, as we look into the upcoming year and some of the things that
we're anticipating, just kind of thinking about what could be some of the great things
that we know will come out of this year and things that we're a little ambivalent about
that we're not sure or a little trepidation perhaps.
So...
Yeah, that kind of dovetails in with our 2025...
It does.
Yeah, that second part of that episode where we're trying to predict.
But that's more kind of raw numbers and trends.
I wanted to get into what actually is causing that and what we could see when we talk about,
oh, well, of course retrospectively, we know that 2022 had a rate shock and it caused supply
issues and whatever in terms of the new home supply issues.
Sure.
2021 had supply chain issues.
What do we see as...
What are the variables that keep me awake as a developer and home builder in 2025 and
beyond things that could linger?
And I feel like I want to start with the bad and then talk about the good and end on a
high mill.
Get that out of the way.
I like it.
What is your rate strategy?
I think what worries me is overall as a developer just in general, this is not unique to 2025,
it's just instability in the housing market.
How much of the housing market is propped up by really low unemployment?
How much of it is propped up by before we had high rates quantitative easing by the
feds and a lot of money supply and cheap money and cheap borrowing costs?
And what does that look like?
And what are we living in right now that we don't even realize such as demographic shifts,
boomers are getting older, boomers are buying new homes in their retirement...
And they own the majority of the share.
They do.
Right.
Yet the biggest cohort of home buyers are millennials.
And there's a lot of pent up demand that we'll get to when we talk about the brightest
spots.
But when I talk about headwinds, what factors are happening right now that we don't even
realize that are propping up demand and propping up the housing market and what factors outside
of our control could change that?
And that is the biggest thing that I worry about is what could cause market instability
in the near future while I have these other projects midstream that I won't have an ability
to make decisions on the fly and change or pass on projects or do things to mitigate my
risk and mitigate my exposure.
That's a fine line between growing, growing too fast and not growing enough and doing
the things that I want to do, want to do more subdivisions.
I want to do more rooftops.
I want to just build more inventory and it doesn't even have to be luxury all the time
anymore like it has been.
I'm okay with reacting to that down, but with that becomes, there's more exposure.
There's less margin in more mid-market homes.
There's more of them.
To do mid-market homes, you're doing entire subdivisions and there's more risk because
if it happens, 10% price, market correction over 100 houses versus a 10% market correction
on three luxury homes that already have more margin in them and I'm only doing three, that's
not as big of a...
It makes you vulnerable.
You have a lot more exposure.
So I feel that that's something that I really worry about and I've been spoiled in luxury.
You have to build the right product.
You have to build what people want.
You have to be fashion forward and design forward, but you can make a lot of mistakes
because the margins in luxury are so great that you can make a 10% mistake on build
cost.
You can have your after completion, our sell price off by 20% and you're still going to
make probably a healthy return on your money.
All your eggs are in one basket.
You're building one or two homes.
That's the risk there.
If something happens in the neighborhood, some new thing occurs that wasn't a factor
when you are doing your feasibility on the intake, but more likely than not, that's not
going to happen.
Most markets are relatively stable.
And the little side, you know, little booster bonus to that also is that I can turn and
burn through these, especially now I have a system in place where I can turn and burn
a luxury home in approximately 18 months.
We're breaking ground on homes right now, three homes in particular in South Shore,
a country club in Lake Las Vegas, which is oddly not in Henderson.
We're breaking ground on parcels I acquired in May and June of 24, which is breakneck
speed to be acquired in a parcel and breaking ground.
And by the way, we broke ground a month ago.
So we're five months, six months in and we're already breaking ground.
Those homes will be substantially completed at the one year mark from owning the parcel.
And we're sometimes two years before we're even moving any dirt to even do the onsite
improvements and offset improvements to do a subdivision.
So you're making decisions that are far, far, far out.
And as you talk about those margins, it occurs to me, you are streamlining the process.
You've done enough of them.
So where you said you have a little bit of flexibility in terms of if you go over in
one area, another, you're still going to make a profit.
There's that piece that says you've done it enough times where you're not making those
initial...
100%.
So you're getting a little bit tighter even on your end.
Oh, 100.
Yeah.
And it was a great, easy way to break in to the development game because I could make
mistakes.
I could have errors in judgment and the market could change.
I had three homes in the ground when COVID happened, when lockdowns happened and that
was a scary place to be.
Now, thankfully the market was fine, but I could have been...
We didn't know in the beginning.
And it would have been okay either way, even if the market would not have been okay because
the margins on them were so good.
And I was a new developer relative.
When I think back, I felt seasoned at the time, but I was a new guy.
And I did not have my stripes yet.
And I still don't on many capacities, but I now know more than I could have ever dreamed
of knowing back from that time.
Only because we've done it.
You have to walk into knowing.
You know what?
When I was growing up, my dad always said, you'll never forget a mistake that costs you
money.
It physically hurts.
Yes.
Right.
And you'll never forget it because it costs you money.
So when we talk about auditing our engineering plans and why are these footers so overengineered
and why is this shear wall like this?
Those are things that I wouldn't have even known seven years ago.
I wouldn't have even known to ask those questions and to be my own advocate.
So it was a really easy way to put some training wheels on and get to the business of building
homes and get a proof of concept.
And now, like you said, I can predict within probably 5% of build costs what it will be.
And if I go over it, it's because I made decisions on the fly that I felt that the home could
sustain and that would help and make the home more marketable.
What do you think about new policy that's coming in?
I mean, what do you and potential conversations of tariffs and some of the other?
Yes.
When I think about how much of that is posturing and how much of it will we see supply chains
react just from the threat of tariffs?
Just conversations about it are creating a climate.
Is creating a climate of instability in the supply chain?
And that's something that I'm really worried about.
And if they happen, God bless us all.
When we have a shock of 30%, 40% on raw goods and the knock on effects that we'll see down
later on in the supply chain and what that means for us.
And a lot of our lumber comes from Canada.
Do we have a tariff with Canada?
Is that part of it?
It's just all this unknown and uncertainty.
What does that do to our home prices?
A lot of our, like I mentioned, a lot of appliances and Samsung and things like that.
They come from Asia and they're imported.
Thankfully, homes are one of the last things still built by hand and one of the last things
that you cannot import.
So many of the goods that go into that home.
Maybe the copper comes from China for their electricity, depending on where you're sourcing
it from.
And even the countertop surfaces and then.
A lot of the cords comes from China.
It's not imported from Italy.
It's Chinese parts.
Some.
But now it seems more like it's not.
That's right.
I mean, yeah, they have that.
They have that supply chain.pat and we're getting a lot of things.
I mean, that's just trust home builders.
Everyone is benefiting.
It will affect home building and it will affect the supply chain.
And then what does it do to local suppliers when they're emboldened by not having to match
you know, imported goods?
And what does that look like?
So what does a whirlpool do to their appliance lines when Samsung has to now pay a 40% tariff
when they import their, when they import their goods?
So what does that do?
Just overall.
It's true the cause and effect of those things get.
It's something to think about.
It gets, it gets dicey.
And those are things that keep me awake at night because it's terrifying to think about
what that would do is how it would shock the system.
And I don't have a crystal ball and there's nothing that there's no, I hope it doesn't
happen.
I don't.
I'll end with it this way.
Do I really believe we're going to see this kind of tariffs now?
I think it's posturing and I think it's mostly rhetoric.
I just hope I'm right.
So I'm not making decisions off of those tariffs, but it's keeping me awake.
That's good though.
Oh, I'm growing more than ever.
But to keep an awareness of it and to know that it's out there and to know that it's
a conversation that's going to be had throughout the year, whether it happens or not.
That's right.
Just like I said, the climate is out there because the rhetoric is the cat's out of
the bag.
Right.
So I think that that's something that is really a big, big wild card.
But will it affect in real time, you know, where the rubber meets the road, is it really
going to change the way we build homes and the costs, the same way that the supply chain
true and true supply chain woes and the shocks to that system?
I don't even know if it'll affect it that much, but it's scary.
I don't want to live through 2021 again.
So even if it's like that, right?
Even if it's like that, that's still more than I care to bear.
But if it wouldn't be business, if it wasn't risky and it wouldn't be business, if it wasn't
exciting and if you weren't having to make decisions on the fly and try to work around
those things.
What I like is that I feel like that home building is another thing that is one of the
last bastions of a level playing field.
For the most part, yes, a big nationwide home builder is going to get a little bit more
sway with zoning, is going to get a little bit more sway in purchasing.
But ultimately, they're not seeing substantially lower lumber prices.
They're not seeing substantially lower cabinet prices.
They're not seeing substantially.
It's not the same as if I were to try to recreate a car and I have to go buy all the parts and
do and get my contracts with these people that cast the dies and supply this and I'm
going to make my own car line and I have to compete with the likes of General Motors
and Honda and all these things.
I feel that it's a more level playing field than that.
Or if I were to...
To some degree, there is the buy in bulk.
Of course.
And so if you're one of the big...
Of course, of course.
And when you think about, when I look at it this way, not to go too far down that rabbit hole,
what they save in buying in bulk, more than make up for an admin because they're such a
large organization.
Absolutely.
And they have to store it somewhere.
They have to store it.
And then...
And then if you look at these layers of management payroll that trust home builders doesn't have,
we're a lean, mean fighting machine.
We don't get the same discounts of buying in bulk, although we do get some sweet hard
deals on things that might be pretty in line, might surprise you.
Small business discounts.
Yeah, right.
Exactly.
That the local vendors really want to do business with us because we're easier to work with.
We're quicker pay.
You're not dealing with one person and purchasing and then that person gets fired and it's a
new person purchasing.
You're largely dealing with myself or a procurement employee and it's the same guy.
He's been doing the same job for years.
So we have those relationships that we get that.
I feel like we get pretty happy with my pricing.
But I don't know.
I haven't opened the books of the publicly traded guys, but I feel like they also...
I don't have a payroll of 150 people in this division.
That's the difference.
Right.
So those costs of operational costs that trust home builders doesn't really have to bear
in relation to our $35 million worth of revenue that we'll sell this year of new homes being
built.
I'm staggered every time you say that.
That's why I said it.
Yeah, it was nice to hear.
I'm glad you said it again.
Right.
As a percentage of that, our operational costs are a fraction.
I mean, our office overhead, our employees, our health insurance, nothing compared to
what these other guys are paying.
There is one more headwind.
The labor shortage.
So nationwide, we're not seeing it as badly here because Las Vegas is a desirable place
for people to live.
There's a lot of inward migration from other places, countries, cities, states that kind
of fills that labor gap, but it's estimated by the National Association of Home Builders
where about 2,000 to 400,000 construction workers short, just as a whole in general.
I don't really feel it.
I'm not on the scale of building 2,000 homes in this market yet, but I feel that there's
enough draw here and the cost of living is still okay versus, let's say, you're building
in the Bay Area and where is a $95,000 construction worker going to live when the average rent
is $4,500 a month.
So it's going to be hard to attract those labor professionals.
And training for new labor professionals, right?
Right.
There are some schools here that have opened in that workforce, but a lot of that labor
is aging out.
It is.
It does scare me, the labor and at least the skill level of it.
But I will say labor begets labor.
So if a son's father was in the roofing industry, there's probably a 30% chance one of his kids
ends up in the roofing industry.
And you know, okay, well, I work with this guy and he went into this.
We were both working at this fast food place and then he got a job doing as an electrical
journeyman, let's say, as an example.
And then his friend follows him because construction workers beget construction workers and construction,
brief construction.
So I feel like there's enough elasticity in our labor market, but I do feel like that's
a headwind to the nationwide labor market.
I don't feel it's a threat to my company.
The markets are a threat to my company, the markets are a threat to my company, but labor
shortage, but it is something that we'd be remiss if we didn't talk about it.
If we're talking about headwinds, we'd be remiss not to at least talk about the labor
shortage because it is something that will factor into the nationwide numbers.
Anything else?
No, that's, I got plenty more negative stuff to talk about.
Well, but the big ones, to be able to address those and think about them and then we can
do it, you know, look back and how have they affected the market over the course of time.
And I hope tariffs are nothing to her.
I don't know if it's something we're talking about in six months and say, well, nothing.
So the bright spots are we're well, way, way, way underbuilt in housing by approximately
in our market around 26%, depending on what analytics person you ask, we're underbuilt
by 26% every single year, which is a huge deficit you're building up nationwide.
It's hard because real estate is so local, but nationwide, I would guess as a country,
we're underbuilt by about 10% a year, just purely guessing off of population growth.
And we're going to, we live in a very new modern city, Las Vegas, but they're aging
out of inventory is a huge problem in the rest of the country.
The average home in the US is 40 years old.
So that home is aging out.
It's not relevant in terms of functionality.
Yeah.
So that's, we don't know a lot of that in Vegas because it's so new built.
It is.
I mean, most of our growth came in the 90s.
Exactly.
The 70s home, we don't have a ton of that inventory here.
We were 160,000 people in the 70s.
Now we're 2.4 million.
So most of our growth has been in 90s and in 2000s and this century.
So I feel that that's something that is good for home builders.
I mean, it's going to be a challenge for the real estate market as those homes age out.
Now, will those homes be torn down?
Most likely not.
Most of those homes will be great avenues for our entry level buyer.
And that's going to be a home that fix a lot of, yeah, has a lot of, yeah, has a lot
of picadillos and has a lot of nuance to it, but it makes for great inventory for the
entry level and then that buyer can slowly put in their, put in money and grow the equity
that home and then move up into something else.
So aged out inventory is a great, not to overuse that word, but it provides a lot of elasticity.
So it gives people places to go.
So that's a tailwind for us.
That's a bright spot as a home builder, selfishly speaking.
And like I said, it's not necessarily good for the overall health of the market, but,
and then I think it's, it's generational.
I think we have a huge cohort of people in the millennial and the Gen Z that are moving
through into that home buying age and are going to find ways, whether it's generational
wealth, being left money, parents helping with down payments.
At the end of the day, the country is leaning towards household formation where our, our
demographics are the opposite problem of Italy and Japan.
We have an overall young, vibrant population.
If you look at our age and they're aging into home ownership.
And there is some multi-generational lifestyle that's happening here that wasn't years ago.
So I think some of that is also creating a greater household for sure.
And it's changing the, exactly.
And as that unwinds itself, maybe it worked to live with mom and dad for a few years.
And then, okay, now we have a kid.
Now it doesn't work anymore.
Now we've been able to save the money.
Right.
I can't get our own.
Exactly.
And the household and created to, and the population didn't change at all.
But the demand for a one home was created.
So I feel that our overall, the moral of the story is in terms of the bright spot, it's
purely demand.
It's the demand is, is very vibrant.
And I worry when I talk about the headwinds that you look at, okay, well, what's propping
up that demand and is there, are there going to be things that quell that demand?
Yes, absolutely.
There will be some sort of shock to the demand.
There will be.
There will be layoffs or, you know, less than Rosie unemployment numbers.
And that might slowly change.
But again, will it be a drop in the bucket?
Probably with how much we're underbelly.
We'd have to see a major drop off in demand to even be in equilibrium.
So those are the bright spots that we should look for.
Bright spots and headwinds.
That's where we'll focus.
We'll look at all the bright spots.
That's always going to be my.
Yeah.
I'm always looking at the bright spots.
I'm making decisions off of the bright spots.
Absolutely.
And big decisions.
Yeah.
That have to be made with, you know, that information.
Yeah.
You can't be afraid of your own shadow.
So.
Well, good.
Thank you for the great.
Could have been another two part.
Yeah, yeah.
Thank you guys for joining us again on another episode of trust the process podcast and we
look forward to seeing you back next time.
Have lots to talk about and can't wait to share it with you on this journey.
Thanks so much.
Bye bye.
Thanks for tuning into the press the process podcast.
Make sure to follow us on Spotify to stay in the loop with the latest insights, project
updates and everything in between.
See you next time.