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construction costs, going, going..

by Gregory La Vardera last modified Jan 23, 2006 08:44 AM
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construction costs, going, going..

Posted by Gregory La Vardera at January 19. 2006

Down?

I've read a series of articles in the WSJ this month about how housing starts are softening, interest rates have climbed, contractors are being forced to become more competitive, and that the trend is spreading from new homes to remodels and additions as well. Could it be true?

We have just come through a period of rising construction costs where I've been stunned by the prices that projects come in at. As much as I could elevate my estimates for my clients numbers continue to come higher than I could expect. But if we are facing a slowdown, if not an outright collapse, we may be facing a unique opportunity for building a modern home.

Prefabs relying on conventional construction materials may also enjoy some lowering of costs, but I'd say that their ability to buy in quantity has always allowed the factories some degree of cost advantage. New Orleans and Mississippi are bound to consume building materials and keep prices elevated, just as hurricane Andrew did in Florida. I think it more likely that lowering of cost will come through tighter competition for available work and less profit for the builders.

So what does this mean to us here at LiveModern? I think if housing continues to soften it offers a rare opportunity to expand the role of modern housing in the marketplace. We are a specialized interest that is driven by other priorities and we may see demand for modern housing rising while demand for conventional housing softens. As a result we may be able to enjoy a window of opportunity where construction costs come down during a time when more and more modern home buyers are seeking to build.

What do you think?

Re: construction costs, going, going..

Posted by Marshall Mayer at January 19. 2006
Greg,

I know the WSJ is not available online, except to paying subscribers, but it would be fascinating to read nonetheless.

I heard this morning on NPR that while there is a bit of a softening in the market, there were still 2,064,000 housing starts in the US in 2005, another all time high. It's just not going up as fast as it was earlier in the year.

The fed is sending lots of signals that their interest rate hikes are about to stop, maybe one or two more notches left in their belt. So the slowdown will continue, but I don't think the growth in the market will stop (or decline). It may in pocket markets, but builders and developers there have been too exuberant for too long. I'd be more worried in these markets about getting equity out of my house, while it's high, in time to building something new.

I always think there are real opportunities to expand the role for modern in the housing market. Having less inflation in the construction costs will help, but I think we'll still have some inflation there. I think the greater opportunity is in simply offering someone a design choice at the same cost (or less) instead of the badly designed homes that a good chunk of the market really doesn't want to live in.

I think 2006 is going to be a great year for modern.

Marshall

Re: construction costs, going, going..

Posted by Chas. Schwartz at January 19. 2006

Perhaps my take is a little different. Today, most modern houses are custom built houses, and the economics of the situation pretty much dictates these are at the higher end of the new home price category, usually way up at the higher end, which conventional homes, of any price, are mainly tracts, or manufactured products, eg, they are built and then sold to strangers rather than custom built for a certain person or family. Most people (and their banks) are primarily concerned with the house as an investment, IOW, how easy it will be to resell, probably at a profit. Therefore, a most important consideration for spec builders (manufacturers) and home buyers alike is to consider the house as a product (not a work of art!) that is as unlikely as possible to offend the next person in line they may need to sell it to. And, most people seem to be comfortable with something bland that has design cues suggesting a better, simpler time in the past, or images of home as it is supposed to be... but often these things come down to thoughts such as (in our CA area): It will be easier to sell with granite counters, it will be worth a little more with crown moldings, etc. - whether or not the basic layout is any good or the place is ready to blow down in a windstorm or all the doors and latches are in the wrong place. So, on the level that people building housing as a business for strangers want to be able to get a quick ROI, and their lenders would insist on it, I don't see why a slowdown in construction would affect the style of construction, or what they think the statistical market would respond to, one way or the other. Modern is today, alas, seen as weird, elitist, possibly a bad investment you could get stuck with. We may not agree with this idea, but I think the majority of lenders and home buyers do. These things move in cycles because it is basically a style issue. Some of these things are regional - there are few to no Cape Cods or high ranches being built (developed)here in Southern CA, but nowadays plenty of Tuscan or Mediterranian boxes of various sizes and degrees of ugliness. An uncle in Oklahoma lives in a fancy McMansion community where the bylaws prohibit ANY modern style construction and everything must be made of stone. A friend lives in No. Carolina where there is commonly a kind of bonus room over the garage we have never heard of around here. But for a Big Deal Purchase or business risk such as housing, it seems the market looks backward in style (if not actual content) for security and modern is just weird and risky, not to mention freighted with scary bright blue politics or worse.

Re: construction costs, going, going..

Posted by Gregory La Vardera at January 19. 2006

I think you are right Marshall, this softening is a slowing of growth, rather than a decrease.

Pottree, I think I am seeing the spec housing market as your are, but the modern housing market as an independent market - I don't think the buyers cross over. Conventional housing built on spec as you describe, modern houses built on demand as you say custom. Although I see them as disconnected in terms of demand, the supply of contractors and building materials affects both markets. If conventional housing goes down, and demand is still strong for modern housing, then people building modern enjoy a softening of construction cost.

Re: construction costs, going, going..

Posted by JohnC at January 19. 2006

It would seem that there are several factors at work here. In suburban areas, where most people live, both cost and uniqueness work against modern housing. So many people buy a house in a subdivision with a specific price point and square footage in mind. They may not specifically like the style of the home, but the easy options are typically very limited.

Those that do want something different (such as a modern home) will have great difficulty finding a builder or subdivision willing to entertain the idea. Most of these people will give up and buy whatever is available.

So, now all you have left are a few courageous souls who are willing to spend the time to identify where they can build a modern home. Their options are typically to move up-scale or out to the country. Both of these drive up the cost.

Builders also increase the cost. Anything different gets marked up 20%. They do this regardless of whether or not the building is structurally different from what they typically do. Different costs extra!

I personally believe there are many, many people of average income out there who truly desire to buy or build a modern home. But, it is very difficult because the system is stacked against them. As the housing market softens, competition will increase among the sub contractors, and costs should decline somewhat. I am not sure how much of an opportunity this will provide to those seeking a modern home because of the other factors.

What is really needed are more developers who recognize the demand for this style and are willing to offer developments of exclusively modern design. If the prices were even close to other housing types, I think they would sell well. I guess you can just call me a dreamer.

Re: construction costs, going, going..

Posted by Gregory La Vardera at January 19. 2006

Thats where LiveModern itself can be an effective tool. Say there is a housing downturn, and we can show a developer that there is a small slice of the market that is still eager to buy - the 15,000 or so members here are a snap shot of that market. This is the kind of edge a small developer needs to prosper through a downturn.

Re: construction costs, going, going..

Posted by Gregory La Vardera at January 20. 2006

The 2nd article listed today in the WSJs What's News summary, under Business and Finance is Home Construction Dropped 8.9% in December, in a fresh sign of a housing slowdown. The article on pg2 titled Home Construction Falls Sharply is subtitled Drop in US Housing Starts Underlines a Slowdown; Anxiety Driven Discounts?

It may just be a decline in growth, but if the WSJ is playing like this, then its going to impact peoples behavior.

This was followed on by an article about how The Home Depot is going to cut new store openings by half and is looking to expand their business to industrial customers.

Whether it is a trend or hype people are getting this message repeatedly. The thing I want to stress, the reason I posted this, it that I think it could allow our movement to make progress. Allow individuals who want to build to get in the ground at a lower price than the recent past. Enable us to persuade a developer experiencing a slow down that our market is still moving.

Re: construction costs, going, going..

Posted by Marshall Mayer at January 22. 2006

That repeated message reminds me of the media when the internet bubble burst. For a while the bubble had a slow leak, but then the whole grew dramatically as the media repeated the message over and over again.

I don't think that will happen here, as the housing market is so different. But it is an opportunity for bright people to act. I don't see the number of ad pages in Dwell go down. (Industry Standard -- I used to work next door to them, what an amazing scene -- was out of business in a couple of years after the bubble they covered collapsed).

More people simply need to know what people on this site are doing. Toward that end, I found a great viral marketing tool -- del.icio.us. It's the new checkerboard at the top left of each content box. From their site:

del.icio.us is a collection of favorites - yours and everyone else's. Use del.icio.us to:

  • Keep links to your favorite articles, blogs, music, restaurant reviews, and more on del.icio.us and access them from any computer on the web.
  • Share favorites with friends, family, and colleagues.
  • Discover new things. Everything on del.icio.us is someone's favorite - they've already done the work of finding it. Explore and enjoy.
It's growing pretty rapidly, and it seriously needs a group of dedicated modern evangelists. A lot of people who use these tools are right in our market demographic.

I'd encourage everyone to check it out. I've also put a link in everyone's 'my favorites" portlet. If we standardized on a few tags (and then embellished on those for each page), people would start finding us more often.

I'll look for other viral marketing tools that could help our members evangelize the great things that are documented on LiveModern.

Marshall

Re: construction costs, going, going..

Posted by Gregory La Vardera at January 23. 2006

I found delicious a few months ago and of course the first thing I searched for was modern house and nothing came up. I've checked back every so often, but perhaps now we can build some momentum there.

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