Friday, October 25, 2019

Building Subcontractors in Scarce Supply

I have touched on this issue before and it continues as home builders continue developing both urban and suburban projects. There is a large amount of urban projects that feature mid rise buildings. Often these types of structures have a concrete and steel base with 4-5 floors of wood framed structure above. This type of construction takes framing subs away from other housing projects and that mean increased time to build and higher costs.

Higher building costs can have a negative effect on new homes, but generally a positive effect on resale properties as those simply become more attractive as new homes get more and more expensive.

The current economic cycle is getting long in the tooth and that means a slowdown is now more likely than not. I do not think we are headed for a major recession, but a slower rate of economic growth is likely, even a short and probably mild recession are coming sooner rather than later.

But for now we are still seeing a construction boom and even as the economy slows, real estate has always been a safe heaven for investors and that bodes well for our local market to ride out any slowdown with light effects.

Sellers on the fence waiting for prime market conditions are now at a crossroads. Did the market already peak? Is now a good time? Now is probably as good a time as any that will arrive in the next 6 months, near as I can see. The future is always a bit cloudy and skies over that future are never really clear. Sellers with a desire to upgrade or downsize are well advised to think sooner rather than later, especially if they are downsizing.

Friday, October 18, 2019

Don't Get Hung up on Price per Square Foot!

Originally posted on August 3rd, 2018 by Rod Sager

So often I hear clients talking about the price per square foot on a residential listing. I even hear real estate agents talking that up. Why is this house $200/sf and this other one is 180/sf? Sometimes people are adamant about not paying more than "x" per square foot. My friends, in residential real estate, the price per square foot rarely matters as a comparative value. There are way too many other variables that affect the value of a residential property. Any property actually, but in residential there is a broad range of variables. The only time that price per square foot can really be comparative is if all other variables are identical or near identical.

For example to use the cliché of apples and oranges why is this Apple priced at 1.48 per lb and this Orange is .99 per lb? Why is a Red Delicious $2.99 per lb. and a Granny Smith is $1.99 per lb. Apparently Red Delicious Apples are in higher demand!

Well friends the only time this price per foot stat really matters is when you have two houses in the same neighborhood, same floor plan, same condition, same upgrades, hell, right next to each other in fact. Then if one is priced at a higher amount, you have to ask, why?

I think price per square foot is the most abused statistic in residential real estate. Ranch homes are always going to have a higher price per square foot. Small homes in expensive gated communities will have a higher P/SF than a large spacious home in a run down neighborhood. A brand new home will cost more per foot than an old house. Homes on acreage will often cost more because the land value is higher.

One simply cannot make any prudent decision based on price per square foot unless all these other variables match. Since that almost never happens, then we have to look at those other variables. In the end what really matters for a person buying a home that they intend to live in, is this: Do you like the house? Does it do what you need it to do? Can you afford it? If you answer yes to these, then you're done, pull the trigger and write it up!

Don't get caught up in price per square foot. I sold a 720 sf house last year for $255k all cash. It was nicely remodeled but nothing over the top. That is $354/sf. I sold a 4200 sf mansion with a breathtaking view of the Columbia River for 750k around the same time. That was only $179/sf and the house was decked to the nines with top grade trim, marble, soaring ceilings, the whole bit. Why such a dramatic difference. Simple, lots of variables. There is a massive demand for smaller affordable homes. Far more buyers than sellers. In the high end the opposite is true. Furthermore, there is a bit of the economy of scale when building a large house. Neighborhood plays a role as well but when comparing a very large house to a very small house you cross one of the rare times that location is not the number one variable. Demand is the number one variable here. When comparing similar homes across neighborhoods, location resumes its role as the primary variable driving values.

A 2000 sf home on a 10k lot next to a railroad yard might fetch $150/sf and the exact same house a few miles away in a nice neighborhood with a view might fetch $225/sf. Do not let the price per foot trap keep you from getting the right house. Understand that smaller one level homes will almost always have high per foot costs and larger homes on a small lot will have lower per foot costs. Here is a simplified example of why this is the case. Let's take a lot in a neighborhood that is 8,000 sf and fully ready to build. The city says the builder can put any house between 1200-2400 square feet, one or two levels. The following is an oversimplified hypothetical scenario:

The lot is 100k and the development costs (underground infrastructure, city required appurtenances, fees, permits, etc) are 35k. The builder is into this deal 135k before the first nail is hammered. The physical structure cost will vary depending on size and design dynamics. The landscaping and other costs will be more or less the same regardless, lets say 10k. So the hard costs fixed are 145k. Lets say the 1200 foot ranch costs 100k to build. That puts the net cost before marketing and other post build expenses at $245k Let's say the builder budgets 15% for marketing and other costs of sale (real estate commissions, taxes, staff, ads, etc). That makes the total cost of goods about $282k. Let's say builder makes a 10% profit. That makes the 1200 foot ranch home $309k. Now the same scenario with a larger and slightly more expensive 2400 sf two story trimmed out the same might cost 165k to build. Now the builder has a total cost of goods at 360k and a sales price at $395k. The cost per square foot on the ranch is $258/sf where as the equally built and trimmed 2400 foot home is only $165/sf.

There are many costs that are more or less fixed regardless of what type of house is put on the lot so the larger house is less expensive to build on a per/foot basis. The builder however makes only $28k profit on the little house where as he makes $36k on the larger house. The builder has a finite amount of land with which to build so he wants to maximize profit and thus larger homes become more profitable despite having a lower cost per square foot. The lack of new small homes puts even more pressure on the resale market for small homes and that is why you might find a 1940s 720 sf house at $354/sf.

Friday, October 11, 2019

Rates Tumble Again

Interest rates continue to be quite favorable and buyers thinking about SW Washington would be wise to invest in local real estate. I wrote last week about Oregon's HB 2001 which bans the Single Family Zoning in all cities in Oregon with more than 10,000 residents.

With rates in the basement and a strong chance for a rush to SW Washington as Oregonians flee the destruction of suburbia, real estate is as good a prospect as it has ever been. Oregon Governor Kate Brown signed several pieces of real estate related bills including HB 2001 over the summer.

Clark County already has a slight real estate price advantage over Washington County and Multnomah County in Oregon. But a rush of new comers across the mighty Columbia could put enough price pressure on our market to move us ahead of our southern neighbors. Buying now before the reality sets in over there could prove rather fortuitous.

Even if we don't see a mad dash north, these low rates are a perfect opportunity to get into the housing market or make the move up to your dream house. Many people fail to realize the significance of these super low rates. Lets say a homeowner bought a 1500 SF 3 bed, 2 bath house in 2014 for $250,000. Lets say it's worth $350,000 today. If the homeowner borrowed 237,500 at 5.5% they have a payment of roughly $1790. They owe about $218k and sell at $350k. Minus closing expenses lets say they walk with a 100k. Now they buy a $500,000 house, much nicer and put down 20% which they just pulled out of the house they sold BTW. The new house won't have mortgage insurance but it will have higher taxes and a bit higher payment coming in at $2300.

But what about the people that bought in 2011? They probably got the same 1500 foot house for $200,000. Their payment is $1300 a month. They owe 155k and sell for the same 350k. After expenses they walk with a very tidy $165k. That shiny new half million dollar home will cost them $1900 which is pretty close to what their current house would rent for.   

Real estate is amazing and one of the best ways to grow wealth for average citizens.

Friday, October 4, 2019

Oregon Bans Single Family Homes Zoning

The Oregon Legislature has passed Oregon HB 2001 which effectively eliminates the Single Family Home zoning in any city with more than 10,000 people. As is typical with government, this legislation is short sighted, politicized, and destructive to the well being of the citizens of Oregon. As is typical the heavy hand of government is wielded like a Thor's hammer to crush the souls of the oppressed.

As is equally predictable the supporters of the bill played the race card. There was a time when single family home zoning was used as a tool for segregation. That is a despicable and horrible practice. In the modern era however it has been used as a more practical tool to allow Americans to enjoy a suburban lifestyle. ALL Americans of ALL ethnic backgrounds enjoy the benefits from the SFH zoning. The very people proponents of this legislation claim to be helping are in fact never going to be able to participate in that suburban dream as the government has just crushed it in Oregon.

State and local governments that want to make duplexes and triplexes more widely available can do so through an incentive process rather than wielding their power like a megalomaniac and demanding every neighborhood become a duplex and triplex neighborhood.

Neighborhoods that were designed for a low traffic, low density development will now be subject to increased densities and traffic. People that spent hundreds of thousands of dollars on homes in quiet SFH neighborhoods will likely see their property values decrease as multi-family conversions increase density and traffic.

Let's be clear what the zoning is designed to do. Zoning is designed primarily to keep neighborhoods conforming to a specific use. This applies to residential, commercial, industrial, and specialty uses. It is zoning that makes it difficult or impossible for a company to erect an oil refinery in your residential neighborhood. Single Family Home zoning is designed to keep high density projects out of the neighborhood. Oregon's HB 2001 will not have an effect on industrial, commercial or special use neighborhoods, but it will allow for higher densities in neighborhoods that were intended and built for low density use. In cities like Beaverton, Portland, and Gresham it is unlikely that the local governments will make the needed improvements to roadways and other infrastructure to support the coming density increases. I say this because I have observed a lack of infrastructure improvements in those areas under current zoning.

I hope I am wrong about this, I hope Oregon has a plan to make this work. My 55 years on this Earth has taught me many things, among them is that Government rarely gets it right the first time, and often never gets it right at all.

Hopefully the more moderate state legislature here in Washington will take a wait and see approach. I think we are well advised to let Oregon burn to ground before lighting ourselves on fire.

Clark County will likely see a mass influx of new residents as Oregonians now have yet another reason to leave Oregon, AKA California Norte.

I have no issue with duplexes and triplexes in neighborhoods. I believe that Vancouver Washington has been working diligently to make suburban multi-family projects viable. What might be a better approach would be a massive overhaul of the HOA system. Making European style flats available for sale would require a comprehensive overhaul of the HOA rules and authority. This would be much better than destroying the American dream for EVERYONE in the name of a few.

OK enough of my rant on the abuse of government. Clark County, Washington just got a massive bump in its stock value in housing. Over the next few years as Oregon's suburban neighborhoods collapse into chaos, Oregonians will seek refuge in nearby Clark County. This may have an effect on our housing that is positive for current homeowners but negative for future first time home buyers. Buyers should be aware that this Oregon Legislation that is expected to be signed into law by Oregon Governor Kate Brown, will in all likelihood lead to increased price pressure on our local market.