How Higher Builder Costs Makes Your Property More Valuable
As home prices rise, typically a large number of homeowners opt to sell, either to cash in on their equity or to move to a different home. But that’s not happening today.
According to Zillow’s chief economist Svenja Gudell, homeowners are not selling to upsize or downsize as often as they would have historically because there’s not enough inventory to trade into. She says that home prices have risen so much that homeowners can’t afford to upgrade in the neighborhood where they are living and there’s not much available on the entry-level. So instead, homeowners are staying put.
Gudell told Forbes that it’s like a “game of musical chairs where someone is left without a seat”. Online broker Redfin told Forbes, “Yes, people can sell their homes in a New York or San Francisco minute, but they won’t have anything to buy.”
The other thing that’s affecting inventory is a lack of sufficient new home construction. Redfin says that housing demand has “significantly outstripped supply” since 2009.
The website reported last month that more than one million new households were formed last year, but just 620,000 new housing units were created. That leaves a shortage of more than 430,000 units. This is one reason that home prices and rents are skyrocketing.
And with all those millennials out there pondering their first home purchase, it shouldn’t be difficult to sell newly constructed homes, so long as they aren’t too expensive. But it isn’t just a lack of interest in building new homes. It’s often all the red tape at the local government level that are driving construction prices too high.
Real Estate Consultant John Burns conducted a survey of more than 100 builders in the nation’s top 33 markets to find out why and where new home construction is lagging. He says the survey shows steady but uneven growth across the country and construction bottlenecks due to new regulations.
He says many of the regulations have noble causes to protect health or the environment, but they are also pushing construction expenses too high to meet the demand for affordable housing.
Burns says his survey revealed a widespread problem with higher costs that didn’t exist even just ten years ago. As a result, many of his private equity clients are reporting cost overruns on “all” their projects.
He outlined several of the cost burdens that developers are now dealing with:
Many reported a cost of at least $5,000 per house for erosion control, and that builders are forced to pay this amount in areas that hardly ever get rain.
He says that several builders in Florida, Illinois, Minnesota, Pennsylvania, and California reported costs of at least $2,500 to meet energy codes.
New mortgage documentation rules are adding at least $750 onto closing costs.
Builders in several markets complained of new sprinkler requirements that will cost upwards of $5,000 per home.
And then there’s often not enough staff at planning and permitting offices to take care of requests. And that causes delays, which can be costly.
They say there’s often “utility delays” as well, in connecting electricity, gas, phone and cable services.
And then there are many unique expenses for cities and regions across the country. That might include a $17,000 expense in Maryland for a higher quality septic system or up to $20,000 per house in new development fees in Minnesota.
Burns cites a CNBC report on a project in San Clemente, California that he says could be a poster child for housing development red tape. The 248-acre Sea Summit development took 40 years from start to finish. Taylor Morrison purchased the stalled development for $200 million about two years ago, and homes finally went on sale at the end of last year.
Developers initially proposed 2,000 homes on that site. The plan evolved over time to just 309 homes, four parks, four miles of public walking trails, and more than a hundred acres of open space and protected habitat. Of course, these homes are not considered “affordable”. The least expensive homes reportedly started in the high $900,000s. But it’s a good example of the obstacles developers are facing.
John Burns told CNBC that many of the regulations are good for the environment, but it’s making the building of affordable homes virtually impossible. He says, “They would love to do entry level, they just need to be able to make money to do it. And it’s getting increasingly hard to build a home for less than $250,000.”
According to the National Association of Home Builders, new regulations and land prices are pushing the purchase price of homes 30% higher than they were 5 years ago. The association says that regulations account for about 24% of the sales price of new single-family homes.
According to Burns’ survey, the quantity of newly-constructed communities has risen an average 4% in the last year. But that’s taking into consideration the two toughest markets of San Francisco and San Jose – they came up as negative 22% and negative 14% respectively, for the addition of new home inventory. Other tough markets where the average growth of new home construction is below the 4% mark and stretching into the negative are West Palm Beach, Houston, Denver, San Antonio and Tampa.
At the top of the list were the East Bay in California, and Fort Lauderdale. They were both up 33% for new home communities. This is good news for Real Wealth Network members who participated in our Pleasant Hill land entitlement syndication. We acquired an old industrial building near BART and are re-entitling for residential homes. The city of Pleasant Hill is actually fast-tracking it so quickly that we actually have to delay so we’ve held it for one year – in order to qualify for long term capital gain.
Sacramento, Orange County, Austin, Jacksonville, Miami and Atlanta were all above 10%. Also above the 4% average are Riverside-San Bernardino, Boston, Las Vegas, Dallas, Minneapolis, Orlando, Los Angeles, Phoenix, Fort Worth and Raleigh-Durham.
Burns says that, in general, Texas and Georgia are well known for their business-friendly environments. He says builders can get things done quickly in those places.
Places where it’s less builder-friendly are California, Washington State, Virginia and Illinois.
All this means that if you currently own property, good for you. The values will continue to rise as long as there’s a dearth of inventory. And if you are trying to build your portfolio, consider buying existing homes near where there are plans for new homes. Those will be your comps eventually, and could be very good for your property values in the future.
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