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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

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New vs. Existing Homes

According to recently released data from HUD and the U.S. Census Bureau, sales of newly built, single-family homes rose 2.2 percent to a seasonally adjusted annual rate of 546,000 units in May. This is the highest new-home sales rate since February 2008.   The National Association of Realtors reported that the sale of previously owned homes also surged in May, rising to a seasonally adjusted rate of 5.35 million, buoyed in part by the return of younger buyers who had long struggled to find a path into the market.

As the housing market returns to normal, we are seeing more and more articles on the pros and cons of buying a new home vs. an existing home.

According to recent survey by Trulia, twice as many people prefer new homes to existing homes.  A “new” home is a home that has never been lived in before, or a home purchased in the pre-construction phase. An “existing” or resale home is a home that was pre-owned. Most existing homes were built between the 1920s and the 1970s.  For the same price, 2 in 5 Americans – a sizeable 41% of the population – either somewhat or strongly prefer a newly-built home over an existing one.

Among the myriad of decisions to make when buying a home is should you purchase a new home or one that has been previously lived in.  Ultimately you have to decide which is best for you and your family.  There are advantages and disadvantages to both. Here are a few things to help you make an informed decision.

New homes can cost more. According to Trulia, a new home costs 20% more than a resale home.

When buying a new home, you are able to work with the builder to customize your home before construction is completed.  Depending on the Builder, you might be able to design your new home from scratch.  At a minimum, you can pick out the carpet, countertops, flooring and paint colors.  You might even get to pick out things like sinks, shower heads and door handles.

With a new home, most of the work is done for you.  You don’t have to lift a finger, a paint brush, or a hammer.  You won’t have to do much maintenance. With brand new appliances, plumbing, heating, and air, you should be repair free for at least a few years – a big financial benefit vs. an existing home.

If you are someone who takes pleasure in fixing up a home, customizing and upgrading it yourself, or tailoring it to your preferences, an existing home might be for you.

New homes come with some of the design elements that today’s lifestyle demands: open floor plans, eat-in kitchens, large master baths, and walk-in closets to name a few.

A new home will likely be more energy efficient built using high-efficiency furnaces, air conditioners, and water heaters, added insulation, energy efficient windows, along with ENERGY STAR appliances that could reduce utility bills by thousands of dollars over the course of home ownership.

A new home might not include certain appliances like the refrigerator, washer and dryer.

An existing home might include appliances which are typically not included in new homes and might also include window coverings and some furniture, etc. which are usually sold for much less since they are used and a burden for the seller to move.

A new home will most likely have the option to include modern technology that many savvy homeowners want like Wi-Fi, USB plug-ins, surround sound, smart gadget capabilities and more saving you lots of time, money, and holes in the walls.

If you want to make a change to energy efficient appliances or more “smart” technology in an existing home, you could end up spending a lot of money.  An existing home was most likely built when the technology for wireless internet and smart security systems wasn’t even a thought in the builder’s mind. Upgrading to modern technology in an existing home can be expensive and can mean more holes in walls and more remodeling.

Besides the fact the home has never been lived in, a new home is clean and worry-free.

A previously owned home can be hiding huge money traps.  The home may look fine, but it could be hiding major issues beneath the surface, such as mold or water damage. The home’s systems and appliances have been used.  The water heater has produced thousands of gallons of hot water, appliances have been used hundreds or thousands of times, and the HVAC system has already weathered a number of winters and summers.  Systems and appliances that have already been used have a shorter lifespan, and may fail earlier than brand new appliances. Previous wear and tear can be hard your wallet.

There are also lifestyle factors to consider.  After all, you’re not just buying a house – you’re buying a home and a neighborhood.

A new home is generally in a neighborhood of new construction, as opposed to existing homes. New homes are created in brand new subdivisions that are having houses built all at the same time. Although some individuals may think this is a plus, it also means that you could be stuck in a construction zone for a few months or years after purchasing your new home.  Some necessities might not yet have been built close to new subdivisions, which could mean you might have to drive farther to schools, grocery stores and work.  If you’re looking for a lovely, quaint, tree-lined older neighborhood that has a well-established community of neighbors, you won’t get it for many years in a new development.

A previously owned home will be in an established neighborhood close to necessities and with a neighborhood culture.  A home in a neighborhood that has been established can be a huge boost to property values and buyer morale.

New homes are typically built on smaller lots than most older homes.  If you’re looking for that big backyard – and lots of space between your house and the next door neighbor’s, you may not find it in a new home.

Take your time and weigh the pros and cons of buying a new versus pre-owned home.  At the end of the day, new or pre-owned, your home should make you feel comfortable for years to follow.

Chuck Miller Construction Inc. believes that homes should be a safe and sacred haven. They should reflect our clients’ values and lifestyle while providing a sense of community. They should be comfortable and long lasting, be designed and built so that you can live there independently regardless of your age or physical ability, and should use energy and resources efficiently and responsibly.  So whether you decide to purchase a new home or a previously owned home, we have the knowledge, experience, and team of qualified trade contractors and suppliers to turn your dreams into reality.

Posted in: cost of building, energy-efficient remodeling, green building, home building, home buyers, homeownership, real estate, Remodeling

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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?

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