They have designed two retail projects–one for a company that has since entered bankruptcy and the other was for 14,000 SF of space–not exactly “multi-million-square-foot mixed-use commercial centers” as his bio on the P-I site claims.

All of their other projects are for public agencies and we know how responsible they are with taxpayer dollars.

Do you honestly believe that Americans are not interested in pursuing jobs in the construction trades any more?

You must be a youngster.

Construction used to be a very good paying job that could support a family (off of one income!). Yes! Buy a home and all!

It was a great trade that many were proud to engage in.

Lord. This country is going to hall in a handbasket. and it seems as though everybody is cheering it on.

In response to your question about material/labor escalation:

In the last 12 months, steel is up 45%, lumber is up 35%, cement is up 40%, copper is up so much I’m not even sure how to keep track anymore without checking the latest spot prices. Material costs are escalating very rapidly in many if not most sectors. That doesn’t even count the very high cost of oil, which is not only necessary for fuel on construction sites and shipping of materials, but is also a key ingredient in many, many building products.

Labor costs have also been increasing at a similar pace. Partly this is due to increased demand and the ability for subcontractors to cherry-pick jobs.

The increases we’ve been seeing have been about evenly split between labor and material escalation, although labor escalation has become more important in the last 9 months.

To a certain extent, the bull market in real estate has been exacerbating construction cost escalation, so a softening market may reduce the multiple a little. However, construction costs are likely to remain high for three reasons:

1) Inflation is continuing apace and the Fed seems unable to really do much about it without causing a full-blown deflationary depression,

2) Much of the material escalation is being driven by dramatic increases in demand outside the US, China and India in particular (for the last three years running, demand for structural steel in China has been about one third of the entire world’s steel output and growing), and,

3) Americans aren’t interested in pursuing careers in the construction trades anymore, resulting in a severe labor shortage.

Total nonsense.

Doing a quick calculation, I see that the median home of 1,720 square feet has a construction hard cost replacement value of about $284,000. Adding in 15% soft cost, the comparative value of new construction for the median Seattle home is $326,600 not including land. That is certainly less than the median home sale price of $427K, but not by so much that we should immediately think we’re seeing a bubble in real estate prices.

Show me where I can buy a lot in this city for $100,000. And where is the profit component? Take a ballpark number for a finished lot of $250k (which is probably low by at least $50k). Add in a profit of 20% (which is likely low) and you are at $750k for a 1,720 SF house. That is preposterous. I can buy a helluva lot more house than that for $750k.

His numbers are flat wrong.

By the way: Duluth is in Minnesota.

Regardless whether I agree, it is very cool for you to respond.

I am curious whether the multiple increase for the last couple years is due more to labor or materials?

Do you foresee that multiple remaining high if/when demand slackens in the future?

1) Of course the numbers I use are retail in the sense that they include both material and labor cost at market rates. Most homebuyers are not in a position to build for wholesale prices, which can be much lower, and must also pay site supervision costs as well. Even my architectural clients have to pay retail unless they themselves are builders (which some of them are). Some builders are able to consistently build at low prices (Quadrant is an excellent example: they build at the very low end of the market and get all their lumber dirt cheap because they are part of Weyerhauser). Many are not. In fact, most large builders with efficient cost structures won’t build right in the city because the costs are too high and blow their financial pro formas apart.

2) Construction costs in major cities are very much higher than they are outside of cities. There are a variety of reasons for that, but it’s been consistently true for a very long time. I’m not comparing Seattle real estate prices to construction costs in Duluth, Iowa, nor to the national averages. I’m comparing them to construction costs in Seattle, Washington.

3) Six years ago, it was still possible to build a mean-level single-family detached house for about $100 to $110 per sq. ft. in Seattle. Those days have long passed. Now, to get into that price range, you have to cut lots of corners. The Quadrant homes I mentioned above typically don’t have a lot of what we might consider basic features: base trim, appliances, and a bunch of other stuff. To get that, you have to pay a premium upcharge (that’s where a big part of their margin is, actually).

4) Quality is a big issue being ignored by many of your commenters. If you were to actually try and rebuild many of the 1920s bungalows so prevalent in Seattle to the same quality level of finish they currently have, your construction cost would be well over the $160/sf number I was talking about (actually, it would be north of $200/sf). I know this because I’ve had clients ask me to do just that and it’s amazingly expensive.

4) I am aware that Seattle is usually about 1.4 times the national average for construction cost. That number has been going up…a lot…in the last two years. From what I’m seeing in cost estimates during the last 24 months, I think the multiplier is now more like 1.5 to 1.6.

5) Even if we assume I’m off by a bit per sq. ft., the argument still holds. At $145/sf (the 1.4 multiplier from national average, rounded down to the nearest $5 increment), the mean 1,720 sq. ft. home has a hard cost of about $250K, not including land or soft costs or anything else. Add 20% soft cost and you get $300K. Since land premiums are running very high as well (as noted in the chapter following the linked one) add a round $125K for land cost for a city lot (which is actually on the low side if you go and price these things out) and you are now right at the median home sale price for May 2006 of $427K.

For all these reasons and more, I stand by my analysis.

On the other hand, there’s not state tax and property taxes are lower here. TX is over 2%/year I believe. CA is 1.25% around the Bay Area (not sure about LA/SD). There are some good incentives to living in Seattle that offset the housing costs.

The one custom-builder that I know told me that he gets his materials at deep discounts and charges his clients full retail prices.

You’re looking at a range of $55 to $70 per SF for sticks and bricks to build a home and $35k to $45k per lot to develop the raw land. Permits vary a lot, but you would probably spend an additional $25-$30k for those per home. Basically would run $85-$100 per SF, no land included.

These are costs for guys doing several hundred homes a year of average quality. Custom and semi-custom would of course be more.

But these numbers don’t come close to the total cost of a home. Additionally you have sales, marketing, interest, insurance, overhead/general conditions, and a number of other costs. It’s not reasonable to look at just the hard cost of home to see if a builder is making too much money on a home.

This is a particular disconnect for me since a friend of mine paid $80k in Arlington, Texas for a 2,000 sf home two years ago. According to the NAHB, that would cover “Framing and Trusses”, “Excavation and Backfill”, Plumbing, and Countertops. I guess the rest of the house (land, fees, etc) was free.

Honestly, with prices as low as they are, builders must be losing money even with current sky-high housing prices.

I think the $70/SF is a bit low in the Northwest… usually the NW has a 1.2 – 1.3 multipling factor on top of the National average… so I think a more appropriate “estimate” would be in the $130 per square foot range for a quality “average” home… and this is for single homes not 1000 unit developments.

So, after all that… my estimate for an average “quality” home would be $195,000 (construction costs only) for a 1500 sq/ft home… without the land, permits etc. and it would probably incur an additional premium if it was built inside of the Seattle city limits.