Real Estate Q&A
First I want to say how much I look forward to reading your answers every week. Very interesting. My question may not be one you can answer but I’ll ask it anyway. I recently read in a copy of “Money Magazine” that in the last three years, plywood has gone up 32 percent in price, framing lumber 25 percent and insulation 18 percent. With new residential construction being down nationwide for the last four or five years, wouldn’t that create a surplus in supply? Checking the local market on new homes, it would appear that the cost per square foot for new homes here has gone down quite a lot during this period. With construction materials going up, how can newly constructed homes have gone down in price? Just seems to me that the prices should be going up, significantly. Thanks, — Jeremy
Thanks for the kind words. Your question is a good one and one that I have heard many times over the past 18 months. You are right — building supplies are going up and have been on the rise for a while now and the quick answer to your question is land and labor costs have offset the rising costs of materials.
A little back history, in the early 2000s building was on a torrid pace and suppliers could not get enough product, but then building stopped seemingly overnight in most all of the country, mid to late 2006. At that point in time there was a steady stream of building materials and costs were high, but reasonable. The one caveat to this is after the rest of the country stopped building, we were still going strong and in the midst of an energy boom, with land values climbing at a staggering rate which offset the fact that building supplies may have been in surplus with the prices leveling off or starting to drop. The other factor at play here were labor prices. Until we hit the wall here in late 2008 and into ‘09, the appetite for new construction was voracious. Virtually every contractor was buried with business and they could name their price, because the demand was off the charts. Land prices and labor costs were sky high.
Over the past several years the entire country has been on an economic hold and housing has been at the epicenter of our financial woes. Since 2008, the surplus in supplies has gone down as supply houses and lumber yards were operating off skeleton crews and very low inventory as new construction was nearly nonexistent. During this same time, at least here in the Grand Valley, land prices plummeted, in some cases by as much as 75 percent and this is the key to overall falling building costs. At one point in 2010 there was a glut of empty lots with virtually NO buyers, which caused the land prices to free fall. Also of note, the labor costs have been down. Contractors and laborers were hit very hard in the recession with many of them leaving their fields of choice for different careers as competition for jobs was fierce. There were little to no margins (profit) in the many jobs over the past five years and many were forced to work for very low wages just to survive. To their credit, hard work and sacrifice, the contractors that are left were the cream of the crop and they will be on the forefront of being there to handle this increase in building. Again, supply and demand.
This is all starting to change, we are starting to see the prices of land go up, again this is supply and demand. As market forces have eaten through the glut of vacant lots, new development has been slow to regain traction and the price for nice, builder ready lots is on the rise. As you see the price of lots go up with costs of supplies and labor going up and cost of financing going up, the writing is on the wall, new home prices have nowhere to go but up, for the foreseeable future. Thanks for the question.
The Kimbrough Team, RE/MAX 4000, Inc