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The Challenge of Affordable Housing – Part 1 a

As I noted in my last blog, during the Building Contractors Association of Southwestern Idaho Political Action Committee interviews of candidates for public office, the majority of the candidates cited the lack of affordable housing as one of major the issues facing us. During the discussions, a number of the candidates said they understood that it is a supply and demand issue.

The more I thought about it, the more I felt the need to dispel some possible misconceptions regarding the supply and demand issue.  A commonly held misconception regarding supply and demand and its impact on pricing is that providers increase prices when demand exceeds supply and decrease prices when supply exceeds demand.  While this might be true in some industries, it isn’t true in homebuilding. Builders use the same mark-up percentage on their direct cost (the sticks and bricks) regardless of demand to calculate the sales price. Builders typically use a 15% to 20% markup. Markup is also referred as the expected or planned Gross Profit Margin.  The markup covers the Builders operating expenses which include financing expenses, sales and marketing expenses, general and administrative expenses (overhead), and the owner’s compensation, and the Builder’s Net Profit Before Taxes. It also covers Slippage – the variance between the Builder’s expected or planned gross profit margin and what is actually attained for a given period or particular job.  Slippage can result from a number of factors including but not limited to unanticipated increases in material and labor costs, delays due to lack of skilled trades or inclement weather, or other factors beyond the Builder’s control.  It can also result from increases in financing expenses due to unanticipated delays in selling the home.

The National Association of Home Builders (NAHB) has been conducting a biennial survey of its builder members and compiling the findings into a publication titled The Cost of Doing Business Study since 1970.  As shown in the table below excerpted from the latest study, during that time, the average Gross Profit for Builders has ranged from 14.4% in 2008 to 23.9% in 1978 with the average being 19.29%. The average Net Profit Before Taxes for Builders has ranged from minus 3.0% in 2008 to 10.0% in 1991 with the average being 5.1%. In 2017, the most recent year for which numbers are available, The Cost of Doing Business Study, 2019 Edition, the average Net Profit Before Taxes was 7.6%.

While it is not a factor in how Builders determine their markup, supply and demand is a factor in the direct cost of the home. The biggest impact of supply and demand has been in the finished lot cost. Over the years, NAHB has periodically conducted “construction cost surveys” to collect information from builders on the cost of the various components that go into the sales price of a typical single-family home.  

As shown in the tables below, the cost of the lot as a percentage of the sales price was 20.3% on 2009 and 21.5% in 2017. But those percentages don’t tell the whole story. In 2009, the average lot size was approximately 21,879 square feet – approximately ½ acre.  In 2017, the average lot size was approximately 11,186 square feet – approximately ¼ acre. The average cost per square foot of a finished lot in 2009 was $3.50.  The average cost per square foot of a finished lot in 2017 was approximately $8.22 – an increase of approximately 235%. 

While supply and demand is a factor, it is not the only factor impacting the cost of the lot as we will discuss in The Challenge of Affordable Housing Part 2 – The Cost of Regulation

Posted in: builder profit, building, cost of building, home building, home buyers, homeownership, housing affordability, housing for all, land development, Uncategorized

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The Challenge of Affordable Housing – Part 1

Last week I spent several days interviewing candidates for public office as a member of the Building Contractors Association of Southwestern Idaho Political Action Committee. A majority of the candidates cited the lack of affordable housing as one of major the issues facing us.

It is not a simple issue of supply versus demand.  Affordable housing is a multi-dimensional problem. Some of the reasons are beyond our control such as increasing material costs due to tariffs imposed by the federal government or the changing demographics.  

However, many of the reasons for the problem ARE within our control or, more accurately, the control of our local elected and appointment government officials. Those reasons include:

  • Increasing fees that add to housing costs
  • Outdated ordinances that limit the range and mix of housing types
  • Unwieldy, lengthy development review and approval processes
  • Environmental/growth controls that constrain land supply and developability
  • Citizen involvement in nearly every phase of the process adds NIMBY delay and uncertainty

We need to recognize the fact that households encompass an increasingly diverse demographic that has changed over time.  Forty-eight percent of adults are single. There are more extended families in multi-generational households. Forty-one percent of young adults live with their parents. Our aging population is living in homes that aren’t very accessible. And we are experiencing a greater divergence in household incomes.

So, let’s start by defining the problem in terms of household incomes.

Generally speaking, affordable housing in the United States is defined as a percentage of household income with the consensus being that that housing expenses shouldn’t be more than 30% of what you earn, leaving 70% of your income for food, clothing, transportation and other necessities. If you spend more than 30% of your income on housing expenses, you are considered “overburdened”.   

According to the U.S. Census Bureau,  the Median Income in 2017 dollars in Ada County is $60,151 for Households, $87,423 for Married Family Households, $33,494 for Non-Family Households.  There are 164,389 Total Households, 84,065 Married Family Households, and 59,435 Non-Family Households. Of the Total Households, 68.3% are homeowners and 31.7% are renters. For Married Family Households, 82.8% are homeowners and 17.2% are renters.  For Non-Family Households, 53.4% are homeowners and 46.6% are renters. But with regard to homeowners, we need to keep in mind that the median home price has almost doubled in the last 10 years and I believe it’s safe to assume that the majority of homeowners purchased their homes for much less than the current median home price.

According to the Boise Regional Realtors, the Median Sales Price for homes in Ada County is currently  $355,000.  A 20% down payment would be $71,000 and the mortgage would be $284,000. At current interest rates for a 30-year fixed rate mortgage, the monthly payment including property taxes and insurance would be approximately $1,850 or 36.9% of the median household income, 25.4% of the median household income for married families, and  66.3% of the median household income for Non-Families.

A 3.5% down payment for an FHA loan would be $12,425 and the mortgage amount would be $342,575. At current interest rates for a 30-year fixed rate mortgage, the monthly payment including property taxes, insurance, and private mortgage insurance would be approximately $2,276 or 45.4% of the median household income, 31.2% of the median household income for married family households,  or 81.5% of the median household income for Non-Family households.

We also need to keep in mind that the median is the middle point and that half the numbers are above the median and half are below. For Total Households, approximately 49% have incomes less than the median.  For Non-Family Households, the percentage is 74.4%.

But household incomes are not something we can control, so we will focus on those reasons we can. 

Next topic:  Increasing fees that add to housing costs

Posted in: building, home buyers, homeownership, housing affordability, housing for all, Millennial Home Buyers

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Posted in: building, economy, education, home building, home buyers, homeownership, land development, Remodeling, sustainable building, sustainable development

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How Much Does It Cost to Build a New Home in Ada County Idaho?

The National Association of Home Builders (NAHB) recently released their 2015 Construction Cost Survey conducted in August of 2015). NAHB’s 2015 construction cost survey was conducted by emailing a questionnaire to a representative sample of 4,090 home builders. The sample was stratified by size of the builder (based on number of starts) and region of the country (the sample being proportional to housing starts in each of the four principal Census regions).

The construction cost survey shows that, on average, 61.8 percent of the sales price goes to construction costs and 18.2 percent to the finished lot costs. On average Builder profit (including owners’ salary and return on capital) accounts for 9.0 percent of the sales prices.

Nationally, the average new home size was 2,802 square feet and the average sales price was $468,318. The average price per square foot was $167.14.

The NAHB Construction Cost Survey provides some additional insights into the cost of construction. The average lot was 20,129 square feet or .46 acres and cost $85,139. The average Total Construction Cost, excluding Lot Cost, Financing Cost, Sales Commissions, Marketing Cost, Builder Overhead and General Expenses, and Profit, was $289,415 or $103.29 per square foot.

How does Ada County compare with these national numbers. The Intermountain MLS Data for New Construction in Ada County reports that as of 11/04/2015, there have been a total of 1,656 new homes sold this year. The average new home size was 2,325 square feet and the average sale price was $323,059. The price per square foot ranged from $111.80 to $236.67 with the average price per square foot was $138.95.

Posted in: building, cost of building, economy, home building

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Would You Buy a Tiny Home?

Two articles caught my attention today. The first was a blog post by National Association of Home Builders economist Robert Dietz titled “Single FSF-size_3q15-1024x768amily Home Size: Flat Trends”. Mr. Dietz reported that according to third quarter 2015 data from the Census Quarterly Starts and Completions by Purpose and Design and NAHB analysis, median single-family square floor area fell from 2,478 in the second quarter to 2,445 square feet. Average (mean) square footage for new single-family homes fell from 2,704 to 2,653 for the third quarter. Since cycle lows in 2009-2010 and on a one-year moving average basis, the average size of new single-family homes has increased 13% to 2,693 square feet, while the median size has increased 17% to 2,472 square feet.

 

The second article arrived in an e-newsletter from Builder magazine. That article was titled “FOUR PLANS: TINY HOMES FOR REAL LIFE” and featured four plans ranging from about 700 to just under 1,000 square feet. Two of the plans include two-car garages.

While the larger homes obviously reflect current market trends, I couldn’t help but wonder if there is actually a market for the “tiny” homes. The article suggested they are suitable for a wider range of situations that might include a young childfree couple wanting a simple bungalow, a small family wanting an affordable first home, or a multi-generational family building an in-law cottage to go behind a larger family home.

I’d like to know what you think. Would you buy a “tiny” home?

Posted in: building, home building, homeownership, real estate

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Why I Am Proud to be a Home Builder and a Member of the National Association of Home Builders

Homeownership is the Foundation of the American Dream.

• For many people, owning a home is part of their American Dream. Homeownership builds stronger communities, provides a solid foundation for family and personal achievement and improves the quality of life for millions of people. It is truly the cornerstone of the American way of life.

• Most Americans consider homeownership to be the single best long-term investment and a primary source of wealth and financial security. Countless generations of Americans have counted on their homes for their children’s education, their own retirement and a personal sense of well-being.

• Yet, a home is so much more than an investment. In good times and in bad, the opportunity to own a home has been a cherished ideal and a source of pride, accomplishment, social stability and peace of mind.

• Changing housing policy now to make owning a home more expensive is unfair and would hurt those that have played by the rules and made the sacrifices to get where they are now.

• It would harm millions of Americans who are struggling to make their monthly mortgage payments and those who aspire to one day own a home of their own.

Homeownership is a Major Driver of the U.S. Economy

• The nation’s housing and homeownership policies over the last century have contributed to the growth of the middle class and helped the United States become the most dynamic economy the world has ever seen.

• Fully 15 percent of the U.S. economy relies on housing and nothing packs a bigger local economic impact than home building.

• Constructing 100 new single-family homes creates 297 full-time jobs, $28 million in wage and business income and $11.1 million in federal, state and local tax revenue.

• A healthy housing industry means more jobs and a stronger economy. Home building increases the property tax base that supports local schools and communities.

• Housing, like no other sector, is “Made in America.” Most of the products used in home construction and remodeling are manufactured here in the United States.

The National Association of Home Builders (NAHB)

The National Association of Home Builders (NAHB) helps its members build communities. Each year, NAHB’s members construct about 80% of the new homes built in the United States, both single-family and multifamily.

Since it was founded in the early 1940s, NAHB has served as the voice of America’s housing industry. We work to ensure that housing is a national priority and that all Americans have access to safe, decent and affordable housing, whether they choose to buy a home or rent.

Achieving that goal is increasingly difficult in today’s contentious and unsettled political and financial environment, one in which the concept of homeownership as a national priority is very much under attack. NAHB champions laws and regulations designed to reverse this dangerous course that will drive down the value of the nation’s housing stock, drive up the cost of rental housing, and threaten the economic recovery.

For more information on NAHB, ask me or visit nahb.org

And when you are ready to design and build your American Dream Home, contact us.

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Posted in: building, cost of building, homeownership

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Waters of the United States

Once again we need your help to reverse the onerous “waters of the U.S” rule that was recently finalized by the EPA and Army Corps (the agencies). You were instrumental in the passage of H.R. 1732 in the House of Representatives in May, and again we need you to help pass companion legislation in the Senate, S. 1140. Please ask your senators to pass S. 1140, the Federal Water Quality Protection Act, sponsored by Senator John Barrasso (R-WY) and Senator Joe Donnelly (D-IN).

The agencies finalized expansion of the Clean Water Act (CWA) will interfere with the ability of individual landowners to use their property and negatively impacts economic growth. The rule will dramatically increase the cost and time needed to obtain a wetlands permit prior to home construction, which will greatly impact the fledgling housing recovery.

  1. 1140, will force the agencies to withdraw the final rule, address many procedural flaws associated with the rule and re-propose a rule that incorporates sound science and important stakeholder input.

For more information on S. 1140, please review these talking points.

Call to Action

  • Write or call your senators
  • If you are a member of NAHB, call – (866) 924-NAHB (6242)
  • Urge your senators to PASS S. 1140, the Federal Water Quality Protection Act

Posted in: building, environmental issues, EPA, land development, pending legislation, Waters of the United States

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Millennial Home Buyers’ Priorities

A recent survey of 503 Millennials (people ages 25 to 34 including 203 current homeowners and 300 individuals who plan to buy a house within 12 months) reveals that Millennial home buyers are interested in maximizing space and affordability while maintaining a level of community found in urban environments, and capitalizing on opportunities to customize and personalize their homes.

More than half of survey respondents (53%) are eager for a suburban lifestyle, and millennials are four times more likely to opt for more space over living in a populated community. However, urban benefits of being within walking distance to parks, grocery stores, schools, and work were high priorities for respondents.

Millennials named “desire to have outdoor space” the most important reason to purchase a home – more important than both financial and emotional readiness for homeownership.

Millennial homeowners are mostly focusing on purchasing a home as their primary residence. But millennials are a demographic that’s dealing with more diverse living situations than previous generations. While many millennials will choose to start families, we also know from Census data that single-adult households are on the rise. Meanwhile, millennials’ retiring parents could add another twist to the question of household composition—especially if those grandchildren come along. So, millennials are looking for flexible living spaces, and 71% say the ability to customize a new home is somewhat or very important. Nearly 4 out of 5 respondents (78%) said a children’s play space was important or a must-have in their home design, and 74% said the same when asked about having a separate living suite. Other flex spaces, including finished basements and office areas, also ranked high in importance, but more respondents were willing to compromise on those spaces.

A full 75% of respondents said they’re looking to purchase a home because they’re tired of renting, and 84% said they feel “financially ready” to purchase a home. The same amount said they’re interesting building personal financial equity through a home purchase. In order to achieve the level of flexibility and location amenities they’re looking for, millennial home buyers plan to spend about a fifth of their budgets on renovations and customizations.

Are you a Millennial considering buying a house? What are your priorities?

Posted in: building, home buyers, homeownership, Millennial Home Buyers, real estate

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Prices Of Newly Built Homes Are On The Rise

Prices of newly built homes are on the rise again, illustrating that home builders are grappling with the same supply-and-demand problems bedeviling the existing home market.

New-home prices, which appeared to lose momentum over the past year, actually have caught a second wind of late.
New Commerce Department figures show that, after four consecutive months of slight declines, the median price of a newly built home in the U.S. rebounded by 4.1% in April to $297,300. That puts it back within striking distance of the all-time high of $302,700 set last November.

Some economists say demand simply is exceeding the pace at which builders can construct homes. Builders have started construction of 7.6% more single-family homes in the first four months of this year than at the same time last year, according to Commerce Department data, but they’ve sold 23.7% more than a year ago.

Some of those homes sold so far this year are speculative homes built at the end of last year. But others just haven’t gone under construction yet. Once builders get threatened with falling behind schedule, many opt to raise prices in a bid to temper demand.
“There just aren’t a lot of homes out there for sale,” said Mark Zandi, chief economist for Moody’s Analytics. “The market looks like it’s going to get even tighter because the level of construction remains very low compared to improving demand. I sense that, until builders can start ramping things up more significantly, pricing is going to be strong.”

In the resale market, the inventory level had held at about 4.6 months in the first quarter before rising to 5.3 months in April, meaning it would take that long at the current selling pace to burn through the available inventory of existing homes for sale. A balanced market, in which buyers and sellers are on roughly equal footing, is typically 6 to 7 months of supply.
Tight inventory in the resale market has resulted in prices close to the all-time high set nine years ago. In April, the median resale price reached $219,400, up 8.9% from April 2014. That increase likely will help to create more supply by pushing up home values and thus fattening homeowners’ equity cushions. However, the downside is that it makes buying a home more expensive, especially for first-time and entry-level buyers.

Posted in: building, cost of building, economy

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What Is Keeping You from Buying A Home?

A recent survey conducted by John Burns Real Estate Consulting, LLC offered some insight into why prospective shoppers are reluctant to purchase.  Of the more than 20,000 people who had recently visited a new home community and responded to the survey questions, 75% were current homeowners, 20% were renters, and 3% were living with their parents.

98% prefer ownership over renting for their next home. Although 20% of those who took the survey are currently renting, only 2% of them prefer to rent today.  2% said they wanted to rent for their next move but 68% of that 2% want to buy a home in the future.

Young couples and families were the most likely to choose homeownership over renting for next move.

75% said they would move for the right opportunity, 32% expect to move in the next year, and 25% do not know when they will move.  Only 24% said they are very satisfied with their current home and have no desire to move.

64% responded “yes” or “maybe” to “What obstacles? It’s a great time to buy!”

When asked about the obstacles to buying a home today, the top three obstacles cited were:

  1. Bad time to sell
  2. Down payment
  3. Lack of confidence in the market

Only 23% said qualifying for a home was a potential obstacle.  50% cited some lack of confidence in the market and, although lack of confidence in the market was most common among the older, more mature buyers; the more mature, experienced buyers were also the ones most likely to recognize that now is the right time to buy a home.

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