I’m not sure how “clearing the back log” will reduce construction costs?

“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.

Kinda sounds like Japan, population 150 million. What direction have land prices there gone since 1990?

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.

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.

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.”

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.

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.

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.

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.

Note, the “On a recent Monday evening…” quote from the CEO of Toll Brothers is from an April 2005 issue of Fortune magazine

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?

…I am not going to sit on the bleachers and watch, I’m going to get in the game.

At least you’re putting your money where your mouth is.

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.

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.

‘On a recent Monday evening in suburban Philadelphia, two dozen sober-suited executives huddle around a giant conference table for the weekly “ops” meeting inside the nerve center of Toll Brothers, the hottest homebuilder in America.’

‘After digesting the data, Toll himself makes the final decision on whether to raise home costs. On this night he’s so confident that people will keep buying that he lifts the prices on projects in Florida, Las Vegas, and other markets by 1%. That amounts to about $10,000 for each house over the list price from the previous week. It’s nothing new; he’s been hiking prices Monday after Monday. At Toll’s Frenchman’s Reserve community in Palm Beach Gardens, the price of a Florida rococo confection called the Signature has jumped $200,000 just since January, to $1.4 million. That’s an average increase of $15,000 a week.’

not much consideration of cost mentioned there…

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.

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.

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.

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.

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”?

It’s not what I see on the Eastside, I’m not sure where you are talking about declining 50%. 50% really?

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!

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.

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.

Exactly.

P.S. (WE FAVOR UNREASONABLY HUGE SUBSIDIES TO THE BRAIN SLUG PLANET.)

No. COGS and market price are not absolutely linked.

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.

No. COGS and market price are not absolutely linked.

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.