First Principles Thinking in Real Estate

“First principles thinking requires you to break down previous assumptions.

In contrast, reasoning by analogy is solving problems based on prior assumptions.”

At its core, first principles thinking is about breaking problems down to their most basic truths and then building solutions from the ground up. Rather than relying on “conventional wisdom”, it challenges us to question deeply ingrained assumptions and uncover new insights.

By examining problems from the ground up, we can liberate ourselves from the constraints of existing knowledge and pave the way for breakthroughs. First principles thinking allows us to see the world differently and find solutions that may not have been apparent before.

FIRST PRINCIPLES OF REAL ESTATE

Let’s reconstruct real estate from the ground up and ask: What are the fundamental truths in residential housing?

EVERYONE LIVES SOMEWHERE

With the unfortunate exception of the unhoused, everyone lives somewhere. Some people own their own homes, others rent. Some have roommates, while others live in their parents’ basement. The vast majority of people in this country have a roof over their heads, regardless of whether mortgage rates are high or low, the economy is booming or struggling, or the stock market is up or down. A fundamental truth of real estate is that housing is a necessity.

However, this doesn’t mean that everyone should or must own a home. Many people rent for their entire lives for various reasons, and it’s not always financial. But, in general, people need a place to live.

SUITABLE HOUSING MAY NOT ALWAYS BE AVAILABLE

Just because people need housing doesn’t mean they can always find it where and when they want. This is another first principle of real estate. In the U.S., there has been a housing shortage in many markets for over a decade. The core issue is that new construction has not kept pace with population growth.

In 2000, the U.S. population was around 282 million. By 2024, it had surpassed 330 million. While housing construction has fluctuated over the years, it has not kept up with demand, particularly in desirable locations. Economic factors, material costs, and regulations have all contributed to this lag in housing availability.

SUPPLY AND DEMAND

When there is not enough housing supply to meet demand, prices either stabilize or increase. This affects mobility. Some homeowners stay put, renters remain renters, and affordability declines. Another first principle of real estate is that supply and demand determine cost.

The reason home prices and rents have climbed steadily is that demand has outstripped supply. And realistically, the odds of building our way out of the current housing shortage are unlikely, at least in many high-demand areas.

ECONOMIC OPPORTUNITIES DEFINE POPULATION CENTERS

Most people prefer to live near where they work. While remote work has increased since the pandemic, many jobs still require in-person attendance, even if only on a hybrid basis. Even fully remote workers need reliable internet, utilities, and access to daily necessities.

Throughout history, cities have grown around economic hubs—ports, rivers, railways, and now, technology corridors. A first principle of real estate is that jobs and lifestyle needs shape housing demand.

CLIMATE LIMITS HOUSING CHOICES

Not all locations are suitable for housing. No one is living in Death Valley or the North Pole. Climate-related risks such as wildfires, hurricanes, and flooding have made insurance prohibitively expensive in some areas, forcing people to reconsider where they live. Another first principle is that environmental factors inherently limit where housing can exist.

GOVERNMENT REGULATION STIFLES DEVELOPMENT

Zoning laws, environmental regulations, and bureaucratic red tape slow down housing development. While some regulations are necessary, they also restrict the pace at which new housing can be built. A first principle of real estate in the U.S. is that regulation slows progress.

CHANGE IS INEVITABLE

Life changes—marriage, children, divorce, job relocation, downsizing, health issues—drive housing decisions. Regardless of economic conditions, a segment of the population is always in transition. The first principle here is that housing needs evolve over a lifetime.

APPLYING FIRST PRINCIPLES THINKING TO REAL ESTATE

Let’s start by defining the problem: housing availability and affordability.

One key question is: Why are major cities located where they are? Historically, it was about commerce meaning proximity to ports, rivers, and trade routes. But if we were designing cities from scratch today, would we put them in the same places? Probably not.

Could we create entirely new cities in the U.S.? It’s possible. Look at Las Vegas - a city that emerged from the desert because of casinos and entertainment. New cities could be developed with affordability and sustainability in mind, supported by a combination of remote work infrastructure and anchor employers.

Another question is: Are we thinking about housing incorrectly? The traditional model of single-family homes on large lots has been the gold standard for decades. But maybe it’s time to rethink that. Adaptive reuse of commercial buildings such as converting office buildings, malls, and factories into housing could help address shortages.

Alternative housing solutions, such as repurposed shipping containers, modular homes, and co-living arrangements, could also play a role. However, zoning laws and regulations often stand in the way of these innovations.

And finally, what about the future of homeownership? Traditionally, people either rent or own, often with a mortgage. But as technology and financial models evolve, could new forms of ownership emerge? Just as cryptocurrency has challenged traditional banking, could a new model disrupt the real estate industry?

First principles thinking forces us to question assumptions and explore solutions beyond the status quo. If we want to solve the housing crisis, we may need to rethink not just where we live, but how we define homeownership itself.