Thursday, July 24, 2014

Is Housing Too Expensive?

Roller-Coaster Housing Prices
I read a post the other day that said the reason for the flat rate of housing sales is that they are too expensive. According to the article by Frank Anton, only 1 in 6 homes sold is a new home. Currently the percentage is even lower. One of the reasons is the national average has new homes costing 45% more than an existing home. I’m shocked that it took this long to figure out what has been the norm for more than fifty years—new homes almost always cost more than existing homes.

It is this relationship between the new home and the existing home that has provided the base line for affordable housing—the existing older home is the affordable home market. The twisted belief that we can build new affordable housing is the mantra pushed by agencies, charities, and cities. And the only way it happens is by subsidies, fees tacked on new housing, and grants. In other words new affordable housing exists because someone other than the homebuyer is contributing to the bottom line cost of the house. Which brings me back to home prices.

Outside of those few who believe that all homebuilders are carpetbaggers, speculators, and opportunists, almost every builder I know won’t build unless he has a confirmed market. There is little if any speculative building today, this is a lesson they learned in 2008 when it all when to hell in a lender’s basket. To believe that builders just throw out product like they were chumming for tuna is just plain silly—the forces of the marketplace would kill them.

At any time in any market housing will be too expensive—until it's not. What controls housing costs are five things: land cost, entitlements, materials, labor, and profit. Working backwards the builder makes choices through these five factors to set his price. He narrows his profit, he finds cheaper or non-union labor, he buys materials in bulk, he begs for fee reductions (building the park may be cheaper than paying the park fees), and lastly maybe he can renegotiate the land cost. It is a complex dance played to the tune of the band—the marketplace—that has its own balancing act of interest rates, debt, and income.

The difficulty today, especially in dense urban markets, is the newest player in the game—the non-profit affordable home builder (the non-profit thing is a ruse, they make a lot of money, it’s just called something different). They compete directly and unfairly with the for-profit builder at the first-time-buyer market. Why would a builder go through all the sturm and drang of the entitlement process to compete at the lowest cost/profit level when, with government assistance, he can and will be undercut? They won’t, they will just build to a different price point.

So, the real reason for the rising cost of housing is that we are not building enough housing—period. The only way that housing costs can go down is to noticeably modify one of the five factors. I don’t see this happening in the near future. Land costs are dramatically rising in urban areas, my experience recently is that cities are not interested in reducing their fees (some are raising or expanding their fees), materials costs are holding steady but this is a result of more supply than demand, labor is flat (but the push on the minimum wage may have an effect), and profit is what it is, except when there is competition which can noticeably affect the price.

It’s my opinion the biggest problem right now is the first time homebuyer market. They are unsure about the future and will bide their time. If they can settle into a good apartment, get their student debt managed, and maybe even find a willing partner to share the burden, the market will change. But right now I think they are marking their time—which is not good for the merchant homebuilder.

Stay Tuned . . . . . . . .

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