Remember how when prices were going up, up, up, one of the reasons it was allegedly justified was “high construction costs”? See this post for a lengthy example of a local real estate professional making that argument. Well, luckily for us, it would seem that construction costs are dropping like a rock. Or, perhaps not so luckily…
A slump in the housing market and low lumber prices have resulted in shutdowns at 18 sawmills in the Pacific Northwest, industry experts say.
…
All told, [Analyst Claudia Shank Hueston of JP Morgan] said, 18 mills in the region are being shut down for varying periods, including indefinite closures of Hampton Lumber operations in Morton and Willamina, Ore., Seneca in Eugene, Ore., and Rosboro Lumber in Vaughn, Ore.With homebuilding drastically reduced, lumber prices fell to $238 per 1,000 board feet at the start of the month, 15.6 percent lower than a year ago, according to the trade publication Random Lengths.
Obviously it would take a while for lower material costs to be reflected in completed construction, but if material costs are dropping 15 percent per year, doesn’t it follow that the price of new construction homes will soon be dropping as well?
(Associated Press, Seattle P-I, 02.05.2008)
deejayoh » Feb 6, 2008 at 10:11 am
Washington and Oregon sawmills are on the far right end of the supply/cost curve. They have a much higher cost structure than interior BC mills – and thus can really only operate at full capacity in boom times.
However, in any case I question the premise that the run-up in home prices over the past five years has had anything to do with the cost of lumber. Land prices have gone up much faster than materials, and even with that – builder margins have been increasing. Home prices were set by the market – not some sort of “cost plus” mark up.
jesse » Feb 6, 2008 at 11:06 am
“doesn’t it follow that the price of new construction homes will soon be dropping as well?”
No. COGS and market price are not absolutely linked.
Joel » Feb 6, 2008 at 11:07 am
Nice try The Tim, but everyone knows that houses aren’t made with wood anymore. They’re made entirely out of granite and stainless steel.
Joel » Feb 6, 2008 at 11:11 am
I think what he’s saying is that the realtors’ premise was that they are linked and so by their own (faulty) reasoning home prices should be falling. But they’ll never admit that.
alex » Feb 6, 2008 at 11:13 am
Agree with deejayoh & jesse about how market and cost are unlinked (unfortunately for us).
Still, there’s planned Harbor Homes construction near my house that seems to be priced some 5% lower than comparable existing housing (I spoke to the agent). Anyone care to explain? Or is that not related to cost at all?
The Tim » Feb 6, 2008 at 11:16 am
Exactly.
P.S. (WE FAVOR UNREASONABLY HUGE SUBSIDIES TO THE BRAIN SLUG PLANET.)
vboring » Feb 6, 2008 at 11:17 am
OTOH, the empire state building was built during the great depression because of cheap labor and materials. to a certain extent, homebuilders are in the same position, with employees fearful of losing jobs being willing to work harder for less, materials suppliers competing for sales, and dropping land values in many areas.
if not for the huge overhang of excess housing inventory, little population pressure to fill the excess houses, and increasing financing difficulties, it’d be a great time to be a builder.
Cougar » Feb 6, 2008 at 11:28 am
It’s back to the old supply and demand, Econ 101. The current surplus of homes for sale on the market does not warrant more lumber production. Builders are undercutting prices on new homes just enough for the buyer to he swayed toward them. With a stall in recent sales, rent increasing, I have noticed the condo market has picked up and is pretty strong at the moment with new listings daily. People are looking at a condo purchase as an alternative to capture the current low interest rates if home pricing is still out of their reach. Good news is we will see less of those ugly clear cuttings as we drive over the mountain passes!
Ira Sacharoff » Feb 6, 2008 at 11:29 am
What this should mean is that there will be lots of cheap houses for sale in those towns where the lumber mills are shutting down.
Always be lookin: Willamina, Oregon, anyone?
Moe Ronn - Realitor® » Feb 6, 2008 at 11:32 am
“People are looking at a condo purchase as an alternative to capture the current low interest rates if home pricing is still out of their reach. ”
Cool, let me run out and get a $400K loan for 5.5% on a an asset that’s going to decline by nearly 50% soon enough. If I buy all of them I can possibly buy, I’m certain to make up my losses in volume. DUH!
Cougar » Feb 6, 2008 at 11:41 am
“Cool, let me run out and get a $400K loan for 5.5% on a an asset that’s going to decline by nearly 50% soon enough. If I buy all of them I can possibly buy, I’m certain to make up my losses in volume. DUH!”
It’s not what I see on the Eastside, I’m not sure where you are talking about declining 50%. 50% really?
deejayoh » Feb 6, 2008 at 11:44 am
Not sure I understand your comment. Condo listings are up almost 90% from last year. Condo sales in January look like they will be down 40%. What are you noticing about that is “picked up and pretty strong”?
b » Feb 6, 2008 at 11:50 am
Cougar -
The just finished the national anthem and we have 9 more innings to go. 50% of inflation-adjusted price for "chocolatey" condos is not unreasonable and probably very likely considering the glut coming online the next 2-3 years. Keep in mind the market decline/stagnation will likely be going on for the next 5+ years if previous real estate cycles are any guide, and even longer if we hit a deep recession for more than a couple of quarters.
rose-colored-coolaid » Feb 6, 2008 at 12:04 pm
I’ve felt material prices were a major influence on home prices…just not so much in the cities. Head over to eastern WA, and you can find houses that sold for $60k 20 years ago, $68k 5 years ago, and $120k last year.
Land is plentiful out there. Jobs are not. Plus, they have a lot of cheap migrant labor, which could be put to building houses.
My assumption is that prices went up primarily because costs went up. If enough people are moving out that you need to build new homes, and if you have enough land to do so with indemnity, then I would expect the actual cost to build a new home to be a major player in prices.
None of this is official, but based on the east/west differences I’ve seen, I would guess that material prices have probably increased the cost to build a home by some $20,000 – $50,000. I would guess that they contributed about the same here as in less populous areas, but that our phantom demand (from speculators and those who can’t actually afford a home) had a much much bigger impact.
The bigger story for prices will probably be labor costs. As we have a recession and jobs dwindle, I would expect labor costs to dive much more quickly than materials, and to have a larger impact on the bottom line cost of a new house.
jesse » Feb 6, 2008 at 12:28 pm
“I think what he’s saying is that the realtors’ premise was that they are linked and so by their own (faulty) reasoning home prices should be falling. ”
Actually I bet, even 2 years ago, a lot of builders were running on razor thin or even negative margins as material and labor costs increased more than they predicted, especially if they pre-sold a significant chunk of their projects. I think it’s a bit unfair to think that passing on costs to consumers is disingenuous in all cases; for many it’s that or BK. Of course in this market it’s BK. Sucks to be them.
deejayoh » Feb 6, 2008 at 12:30 pm
Read this quote from HBB today – from but biggest builder in the country
not much consideration of cost mentioned there…
AndySeattle » Feb 6, 2008 at 12:46 pm
“My assumption is that prices went up primarily because costs went up.”
Demand and ease of entry drove up prices. Mortgages being handed out like gift baggies at the Pink Pony party caused a majority of this mess. Couple this with watercooler discussions on comparing how much equity we all ‘earned’ each week just fueled the demand gotta-have-it fire.
Cougar » Feb 6, 2008 at 12:59 pm
Deejayoh and b; exactly my point, there is a enormous amount of condo’s on the market, (my guess a majority are conversions), up from last year that makes it attractive to buy and rent it to yourself instead of putting 84K over 5 years in your landlords pocket. Can we really use sales numbers from 05, 06, and 07 considering the loose lending standards that are not available today? We will plateau for the next few years in new housing, prices will drop enough to attract buyers and at the same time there will be growth and I am not going to sit on the bleachers and watch, I’m going to get in the game.
Moe Ronn - Realitor® » Feb 6, 2008 at 1:48 pm
We are just past the peak of a huge bubble and we have more inventory coming soon, so much so that many projects are now stalling out. Either way, we have more inventory than demand, which is very unlikely to change within the next 2-4 years. For several years everyone said real estate only goes up. Well, if you study history and economics you know that is not true. If you think paying $84K in rent is expensize, try loosing $200K in equity while at the same time almost all of your inital mortgage payments go to interest. $84K sounds like a good short position to me.
CliveL » Feb 6, 2008 at 1:57 pm
Note, the “On a recent Monday evening…” quote from the CEO of Toll Brothers is from an April 2005 issue of Fortune magazine.
b » Feb 6, 2008 at 2:00 pm
Courgar -
You should pencil out the actual cost of your mortgage, taxes, insurance, maintenance and home owners dues and then tell me its attractive to buy a condo right now instead of rent the same place. On a $400k condo you are looking at easily $3000-3200 a month outlay (mortgage alone is $2400), and of that maybe 10% is going to the actual loan balance. If you cannot find a very nice rental equivalent to a standard Seattle $400k condo for less than $2700 then you are not trying very hard. They are more like $1400-1600 for the equivalent. I’d rather pocket $1k+ a month and not take on the leveraged risk until it makes more sense.
Joel » Feb 6, 2008 at 2:10 pm
At least you’re putting your money where your mouth is.
deejayoh » Feb 6, 2008 at 2:26 pm
the point was the pricing was demand driven, regardless of the date. They’re dropping prices today. Does anyone believe it’s because their costs are going down?
TJ_98370 » Feb 6, 2008 at 2:40 pm
As this relates to the cost of new construction – I recently overheard a middle aged man conversing with a friend and he told his friend that he really wanted to buy a home in the Port Orchard area but he could not find anything that would meet his needs within his price range. So, instead of buying an existing home, he decided to buy land and have his new home built, because it was less expensive!
I know, I know — I don’t have the details. But it is interesting to contemplate the possibility that the market may be so crazy that it really is cheaper to build than to buy an existing home right now.
Geordie Romer » Feb 6, 2008 at 3:37 pm
I have to call you on this, since no one else is. The author of the article at the PI Blog that you link to is an architect and designer not a real estate agent. I thought his article did a nice job discussing a NUMBER of factors that go into the cost of a home, only one of them being the price of lumber. In my market, if you think you can build a home for cheap, I wish you the best of luck. Land costs will be your big surprise. I don’t have any links, but it’s my understanding that costs like concrete, steel and copper have gone up in recent years due, not only to the recent building splurge, but to international demands as well.
Mark L » Feb 6, 2008 at 3:37 pm
As for new construction selling for less than existing homes in the same area, that is a pretty good tactic. Undercut older comps by 5-10%, and still make a pretty decent profit since the local prices have been quite sticky on the way down so far (for now?).
As for new construction, there is a lot less demand for construction labor so wages are certainly down. At the peak of the boom in CA (I left there in Sep ‘06), you couldn’t even find a contractor to come to your home for less than a $20,000 job. And $20,000 didn’t go far at the peak (one example – 400 sq ft of installed hardwood floors in a hall and bedroom – for someone I know – who did it themselves for much less). Now contractors are competing for any work. At the same time, building material commodity prices are dropping due to reduced housing demand (or more accurately, the forecasted reduction in demand) – concrete, drywall and lumber had skyrocketed in price in the boom.
I think we are coming up into a good period for those of us who already have lots and want stick-built custom homes.
Moe Ronn - Realitor® » Feb 6, 2008 at 3:56 pm
Geordie has a point. Asia, China specifically, is building its economy and industrial base. They are competing heavily for conductive metals and various forms of energy. So yes, copper, aluminum, steel and oil aren’t likely to go down much. But, at least the cost of lumber is dropping, so maybe that will offset the prices of your pipes and wiring. However, many homes are now being built with polymers for piping. Well, that all comes from petroleum, so maybe not a bonus.
Moe Ronn - Realitor® » Feb 6, 2008 at 3:57 pm
I’d rather a) buy a home built in the 50s or early 60s or, b) buid my own from a variety of salvaged materials.
deejayoh » Feb 6, 2008 at 4:23 pm
Demand in China will go down precipitously as our economy slows down, and with it their exporting of goods to us. On top of that, almost any commodity you can name is at a cyclical high – because of the booming economy worldwide. Aluminum, copper, steel, etc are far more likely to go down than they are to go up in the coming downturn.
nitsuj » Feb 6, 2008 at 5:50 pm
“People are looking at a condo purchase as an alternative to capture the current low interest rates if home pricing is still out of their reach.”
What’s that old saying about a fool and his money? I hope their mortgages have a checkbox that says something like “I will not try to sue anybody if I lose equity, nor will I ask for government assistance of any sort.”
economist » Feb 6, 2008 at 6:15 pm
Land costs will be your big surprise
I’ve got a big surprise for you, Geordie. Land doesn’t cost anything. It’s already there.
The market price for land is driven by the market price of the finished house. Not the other way around. It will only sell for what builders are willing to pay, just as houses will only sell for what buyers are willing to pay.
Land price = market price of house – cost of construction – profit margin.
Since construction cost is much less volatile than the market price of the house, land prices are much more volatile than house prices. If you had been following the situation in Florida, for example, you’d see that land prices have fallen as much as 80% already, while house prices have not fallen 1/2 as much – yet.
Ben » Feb 6, 2008 at 9:17 pm
Hey Moe -
I would not touch most houses built in that era. Asbestos cleanup is expensive, and mesothelioma is a "female dog".
Personally, I think that some of the higher end new construction is very nice around here. But you have to part with about 7 figures to find it. When the crash brings things down a bit more you will get a lot for your money.
Geordie Romer » Feb 6, 2008 at 9:51 pm
Economist-
I’ll be sure to call you when land prices drop in Leavenworth and Lake Wenatchee. I’m not going to use the “they ain’t making any more land” cliche (oops, I think I just did) but I live in a county that is topographically challenging (steep) and only 15 % is in private hands. Certainly the Growth Management Act and attempts to preserve local orchards have also added to the scarcity. Maybe thats why there are no new residential housing developments, just condos. (No land.) Maybe “land doesn’t cost anything” in Seattle, land of the pink ponies, but where I live it seems to be getting more expensive every year. I would never suggest to a client to buy land because it is cheaper to build than to buy an existing home. It’s not spec builders buying land here, it’s people who can afford to build custom homes.
economist » Feb 6, 2008 at 11:10 pm
I live in a county that is topographically challenging (steep) and only 15 % is in private hands.
Kinda sounds like Japan, population 150 million. What direction have land prices there gone since 1990?
nitsuj » Feb 7, 2008 at 11:00 am
“But prices for King County condominiums, which had held up better than single-family homes, sank in January to $270,500 — down 6.7 percent from December, and 1.6 percent below January 2007.”
Greg M » Feb 7, 2008 at 12:14 pm
I will be building a house on some land I own in the near future. Does anyone know if construction costs around here have fallen (besides lumber)? I have not seen anything to indicate that labor, concrete, windows, etc. have changed but can’t help but think it’s a lot cheaper now than earlier?
Deran » Feb 7, 2008 at 9:40 pm
I really can’t see anyone building any new homes for the construction costs to be cheaper until the “market” recovers and clears the back log.
“Agree with deejayoh & jesse about how market and cost are unlinked (unfortunately for us).”
Well, it would seem to me that this lack of a link is a another very clear example of the hype abt “free market” capitalism. It’s all specualtion, pyramid schemes and government giving taxpayer dollars to prop things up when they crap out.
Greg M » Feb 8, 2008 at 9:32 am
“I really can’t see anyone building any new homes for the construction costs to be cheaper until the “market” recovers and clears the back log.”
I’m not sure how “clearing the back log” will reduce construction costs?