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 . . . . . . . .

Housing 2014

This time of year every national newspaper and trade magazine or journal spits out facts about housing: its recent sordid past, its numbers, and its future. They will write what they write and since every housing market is local it really doesn't mean a thing to most Americans that builders can't find land in north San Diego, or the tiny size of new apartments in New York City, or the dearth of affordable housing in San Francisco. I can assure you that someone in Des Moines doesn't give a rat's pittutty about the rent of an apartment in the City by the Bay, it only makes them smug.

The old reliables are still there, growth of the population, the shifting of population to more southerly locations, the push out of cities into the suburbs (yes, that is the truth, check out Kotkin's and Cox's work), and for some urban markets increased pressure on the housing base – witness San Francisco and the desire by the young techies who want the urban lifestyle yet work thirty miles south in Silicon Valley. As I said housing is local, kind of.

But there are trends in the overall market that should be considered. The following are some thoughts on three of the critical issues facing the general housing market, take them for what they are.

Land

They ain't make any more of it. But forty acres outside of Denver is a lot different than one acre in Santa Monica. The underlying cost of a housing unit is land, but the critical issue is the market and availability. What can the market support? For the better part forty years there has been a gradual, and often with voter approval and bonds, removal of the land from the housing marketplace for parks, wetlands, conservation areas, mitigations, and even aesthetics. Each lost acre forces up the price of another acre. As an example there are tens of thousands of acres of developable land between Oakland and Concord, California but most is now locked into parks and open space. This pushes growth into the Central Valley where farmland is lost. Ones man's scenic view is worth more than orchard or field of corn.

The Baby Boomer Generation

This is a huge opportunity for creative developers. Millions of men and women are sitting on trillions of dollars of equity in their homes waiting for the right moment to move out and "retire." But there is nothing available in their specific market. Here is what they (or I) want: 1850 to 2400 square feet, ground floor master bedroom, highly amenitized interior, good to great suburban neighborhood, garage, security, minimal yard (but good private facilities), and affordable monthly dues/HOA. It is a market that is very underserved in most regions.

Affordable Housing

If there is one glaring debacle that has contributed to the housing crises in the urban marketplace it is the creative use of the fiction called affordable housing (AF). Pass a law to fix a market problem created by the politicians themselves. Everyone feels good, except for the people trying to find a home. It is now so deeply ingrained in the business model of housing that it can probably never be extracted. The most affordable home is an existing home in most urban markets. And to put an existing home on the market requires another home to be built in the same market – usually at a higher price. All well and good, except when a highly subsidized AF comes on the market that directly competes with the existing housing stock. Often that AF is subsidized with fees placed on other non-AF units (adding to their cost), it is given priority in the approval process (time and money), and is targeted at particular markets or economic sectors (approved discrimination). In the long run the housing stock of a region suffers, prices increase, housing becomes unavailable, but I'm happy to say everyone feels so much better. One lasting impact is that the development community walks away from the production of inexpensive and affordable housing. There was a time when this was a good market to build in, now its avoided and left to the quasi-public non-profits, the cities and their whims and agencies, and the cradle to grave attitude of many city and sate governments.

Stay Tuned . . . . . . the next year will be very interesting!