Check out the Federal Reserve’s Beige Book report’s roll-up of “moderate” and “modest” economic and housing traction, the latest official read on the little recovery that could.
Calculated Risk’s Bill McBride highlights a key paragraph on regional residential real estate worth discussing:
Residential real estate activity improved across Districts. Reports about existing- and new-home sales were mixed, but most Districts noted a slight to modest increase during the period. Residential construction was up in the Cleveland, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, and Dallas Districts. Home prices grew in many Districts, including Boston, Philadelphia, Cleveland, Atlanta, St. Louis, Kansas City, and San Francisco. Philadelphia reported that the strength of the single-family market is in high-end housing. In contrast, Kansas City reported that sales of low- and medium-priced homes continued to outpace sales of higher-priced homes. Dallas reported that the sales of lower-priced homes remained solid.
Drill in further, to the district by district accounts on real estate, construction, and home building activity, and you’ll see explicit comment that scarce “inventory is a drag” and “materials and labor prices are rising,” and here, specifically in Chicago’s Seventh District, the commentary reads:
Demand was strong for homes priced under $250,000, modest in the $250,000 to $500,000 price range, and declining in the over $500,000 market.
This clarifies the point of this morning’s note to you, one that echoes a clarion call that we’ve been harping on for a while, and one that George Casey addresses so eloquently in his latest contribution, “Home Building’s Elephant in the Room.”
That is this:
Is it hard to imagine and hard to do in today’s rats’ nest of local and national regulations and fees? Still, to make an economically profitable living building homes in the $170,000 to $225,000 range is the sine qua non for housing, for home builders, for investors, for policy makers, and whether they know it or not, for local residents whose municipal coffers need all the help they can get from new revenue sources.
You take that land base cost and add to it direct costs of labor, materials, sales, marketing, and other assorted overheads, and you plug all that into the design and engineering templates that dominate the production home building landscape, and well, it’s going to be a long-shot to get many younger buyers thrilled about a sub $225,000 home that fits the bill and makes money.
A lot of big builders don’t worry so much about that challenge, because what they’re paying for lots in many markets knocks them out of that ball park altogether. They can’t pencil homes for below $225,000, period. Not even tiny, ugly ones. And they won’t.
However, that doesn’t mean someone won’t.
Land base cost aside, what’s in the way of building homes that offer renters ownership in communities and neighborhoods of America’s future, giving them reasonable access to their work center, and a place to build their own future?
George Casey’s “elephant in the room” image looked like this.
Maybe the “elephant in the room” really looks more like this.
Maybe we need to be looking to and listening to brash, bold young types like Tony Capasso, whose Construction Automation start-up is bent on bringing new automation, technology-driven process and manufacturing to home building. He says:
“As far as I can trace my family’s roots back my ancestors were builders, I was put here to change the game for future generations”
So, when you think about investing in solving home building’s No. 1 challenge, it might be worth thinking differently. Instead of thinking about hourly labor costs, commodities costs, etc., maybe there’s a way of stepping back and looking at the process differently.
How about taking that trip to Sweden, to Germany, to Switzerland, to the Netherlands, to Japan, to look at some of the ways folks in those places have dealt with people, and time, and financial constraints, and turned them into opportunities. How about a trip Down Under to have a look at this baby.
Hires for 2017 and beyond for housing and home building organizations had better include robotics engineers, machine learning experts, artificial intelligence developers, radio frequency identification specialists, virtual and augmented reality applications engineers and the like.
Especially now, while things are tracking in the right direction, if it ain’t broke, fix it because–somehow or other–it’s going to be broke sooner than you’d like.
