3 ms·

1/3 of US Homes Cost More to Build Than They're Worth

12 points by masonhensley 15y ago

kevinpet 15y ago
"Cost more to build than they are worth" means "we built something in hopes of turning a profit, and in fact, we can't sell it for as much as we planned, so we won't turn a profit." This isn't a mysterious conspiracy on the part of appraisers. They shouldn't have built those houses that aren't worth enough to cover the cost of building them.
- roel_v 15y ago
  Did you even read the article? The point is that when people want to have a home build, they get a quote from a builder, agree on a price, then go for a mortgage. To get one, the house (that is yet to be built) needs to be appraised. It's about those appraisals that the article is about - the houses are appraised at less than they can be built for, even when nobody has turned a profit yet (well the builder turns a 0.5 % profit on average, according to the article).
  - kevinpet 15y ago
    Yes, I read the article. The bank is telling them "you are stupidly overpaying, our risk is based on the resale value of the collateral, and we think the collateral is only worth $X, so we are not going to loan you more than 80% of $X." Putting this magic voodoo phrase "less than they can be built for" in italics does not make it any more meaningful. Some other things that can't be made for less than they are worth: manual typewriters, augmented reality glasses, 50 foot butter sculptures of Mickey Mouse. It happens that right now in our current housing market, there is a surplus of existing homes which means it is not economical to built houses. Now, it seems unlikely that this is a permanent state of affairs (since houses, unlike manual typewriters, are still in pretty high demand).
cowkingdeluxe 15y ago
There's not many facts or statistics in this article, more of an anecdote. I highly suspect it's more of a "we're mad because we can't sell houses for insane prices like we could in 2007 so we're going to paint ourselves as the victim."
mindslight 15y ago
That's it?! Maybe one third is accurate for new-construction cookie-cutter homes where turning undeveloped land into a neighborhood contributes to the profit. But after pondering the financials versus replacement-cost of a metro-Boston historical house that I'm currently involved with, I can only come to the conclusion that building a new home (and major renovations in general!) should be seen as luxury spending on one's specific desires, not justified as some sort of nebulous "investment".
- delsarto 15y ago
  > not justified as some sort of nebulous "investment". I can never understand on these HGTV shows how someone does $X work to a house, then they get appraised and someone says "you increased the value of the house by Y%". There's even a whole show based around it which I can't think of, where they appraise your upgrades and how much value it added. Strictly speaking, I'd think that the moment the construction workers walked out, you had increased the value by $X, i.e. whatever it just cost you to get them to do the work, and from that moment on it's depreciating. Maybe there is some "convenience" factor if you sold right then as the next person wouldn't have to bother with the upgrade; but they're also not getting new renovations (and presumably warranty, etc). Why is your house suddenly worth so much more when all you did was get a kitchen guy to come in an do his thing?
  - mindslight 15y ago
    Fundamentally they're goading people to spend money on themselves and call it "investment". Sure, some improvements can certainly make a buyer value a house higher than the cost of doing the improvement (for example, one busted-up room or lots of peeling paint could cast the whole house in a bad light regardless of the rest). But your $20K new kitchen is most likely never going to specifically be worth $20K to someone else (especially after time passes). However, another large part of the problem is that a bank will deny/scrutinize giving a new homeowner an additional loan to remodel their kitchen, but an already-done kitchen will be included in the appraisal for the mortgage.
  - cpher 15y ago
    That's not the whole story, though. Sometimes you need to remodel just so you can sell your home, i.e. make it competitive with the neighborhood. We're a couple of months away from rehabbing our master bathroom because it's so bad that it would be hard to resell it in this market. So, I think you're looking at it from the wrong perspective. It's not a strictly calculable amount when you re-hab a home--part of the subjective monetary value is what a future owner doesn't have to do after making a purchase.
aristus 15y ago
Title is editorialized and misleading. "One third of builders said that some homes were appraised at less than they were built for" is NOT equivalent to "One third of homes are appraised less than their worth".
dsil 15y ago
99% of US Software costs more to write than it's worth.
Tangaroa 15y ago
Reactions: 1. It's worse than it sounds because home prices include land. If the article is true, it often costs more to build a home than that home plus the land is worth. 2. House prices are still inflated. Adjusted for inflation, houses probably cost two to three times as much as they did ten or fifteen years ago. What has made home building so much more expensive that the inflated home prices do not cover the costs of building them? It's not labour; the unions were broken by the importation of illegal immigrant labour in this time period and the labour costs have gone down. So why are the costs so much higher?
meric 15y ago
Just practicing thinking through this with my knowledge of finance and economics... The worth of an investment is the sum of all its discounted future cashflows multiplied by some sort of risk factor that depends on standard deviation of those flows, plus the value of the option of being able either to expand or liquidate the investment at any time. The price of an investment can be different to their intrinsic worth (which can only be estimated), especially during peaks of booms and busts. The worth of a consumer good is how much marginal benefit the consumer derives from the good. By saying "1/3 of US Homes Cost More to Build Than They're Worth", they imply: 1. For new homes that are investments, the current price is too high compared to their intrinsic worth. 2. For new homes that are built to be lived in, somehow the marginal benefit derived by the owners has now dipped below the cost to have built it. Dang. Of course, [2] sounds ridiculous. So the third of homes they are referring to must all be investments. They want to say house prices are going to keep falling because its still too high, and that no one is buying new homes, so fewer people will build them. What happens if no one is building new homes? Supply is reduced... What happens then is now left as an exercise to the reader.

12 points by masonhensley 15y ago

"Cost more to build than they are worth" means "we built something in hopes of turning a profit, and in fact, we can't sell it for as much as we planned, so we won't turn a profit." This isn't a mysterious conspiracy on the part of appraisers. They shouldn't have built those houses that aren't worth enough to cover the cost of building them.

roel_v 15y ago
Did you even read the article? The point is that when people want to have a home build, they get a quote from a builder, agree on a price, then go for a mortgage. To get one, the house (that is yet to be built) needs to be appraised. It's about those appraisals that the article is about - the houses are appraised at less than they can be built for, even when nobody has turned a profit yet (well the builder turns a 0.5 % profit on average, according to the article).
- kevinpet 15y ago
  Yes, I read the article. The bank is telling them "you are stupidly overpaying, our risk is based on the resale value of the collateral, and we think the collateral is only worth $X, so we are not going to loan you more than 80% of $X." Putting this magic voodoo phrase "less than they can be built for" in italics does not make it any more meaningful. Some other things that can't be made for less than they are worth: manual typewriters, augmented reality glasses, 50 foot butter sculptures of Mickey Mouse. It happens that right now in our current housing market, there is a surplus of existing homes which means it is not economical to built houses. Now, it seems unlikely that this is a permanent state of affairs (since houses, unlike manual typewriters, are still in pretty high demand).

cowkingdeluxe 15y ago

There's not many facts or statistics in this article, more of an anecdote. I highly suspect it's more of a "we're mad because we can't sell houses for insane prices like we could in 2007 so we're going to paint ourselves as the victim."

mindslight 15y ago

That's it?! Maybe one third is accurate for new-construction cookie-cutter homes where turning undeveloped land into a neighborhood contributes to the profit. But after pondering the financials versus replacement-cost of a metro-Boston historical house that I'm currently involved with, I can only come to the conclusion that building a new home (and major renovations in general!) should be seen as luxury spending on one's specific desires, not justified as some sort of nebulous "investment".

delsarto 15y ago
> not justified as some sort of nebulous "investment". I can never understand on these HGTV shows how someone does $X work to a house, then they get appraised and someone says "you increased the value of the house by Y%". There's even a whole show based around it which I can't think of, where they appraise your upgrades and how much value it added. Strictly speaking, I'd think that the moment the construction workers walked out, you had increased the value by $X, i.e. whatever it just cost you to get them to do the work, and from that moment on it's depreciating. Maybe there is some "convenience" factor if you sold right then as the next person wouldn't have to bother with the upgrade; but they're also not getting new renovations (and presumably warranty, etc). Why is your house suddenly worth so much more when all you did was get a kitchen guy to come in an do his thing?
- mindslight 15y ago
  Fundamentally they're goading people to spend money on themselves and call it "investment". Sure, some improvements can certainly make a buyer value a house higher than the cost of doing the improvement (for example, one busted-up room or lots of peeling paint could cast the whole house in a bad light regardless of the rest). But your $20K new kitchen is most likely never going to specifically be worth $20K to someone else (especially after time passes). However, another large part of the problem is that a bank will deny/scrutinize giving a new homeowner an additional loan to remodel their kitchen, but an already-done kitchen will be included in the appraisal for the mortgage.
- cpher 15y ago
  That's not the whole story, though. Sometimes you need to remodel just so you can sell your home, i.e. make it competitive with the neighborhood. We're a couple of months away from rehabbing our master bathroom because it's so bad that it would be hard to resell it in this market. So, I think you're looking at it from the wrong perspective. It's not a strictly calculable amount when you re-hab a home--part of the subjective monetary value is what a future owner doesn't have to do after making a purchase.

aristus 15y ago

Title is editorialized and misleading. "One third of builders said that some homes were appraised at less than they were built for" is NOT equivalent to "One third of homes are appraised less than their worth".

dsil 15y ago

99% of US Software costs more to write than it's worth.

Tangaroa 15y ago

Reactions: 1. It's worse than it sounds because home prices include land. If the article is true, it often costs more to build a home than that home plus the land is worth. 2. House prices are still inflated. Adjusted for inflation, houses probably cost two to three times as much as they did ten or fifteen years ago. What has made home building so much more expensive that the inflated home prices do not cover the costs of building them? It's not labour; the unions were broken by the importation of illegal immigrant labour in this time period and the labour costs have gone down. So why are the costs so much higher?

meric 15y ago

Just practicing thinking through this with my knowledge of finance and economics... The worth of an investment is the sum of all its discounted future cashflows multiplied by some sort of risk factor that depends on standard deviation of those flows, plus the value of the option of being able either to expand or liquidate the investment at any time. The price of an investment can be different to their intrinsic worth (which can only be estimated), especially during peaks of booms and busts. The worth of a consumer good is how much marginal benefit the consumer derives from the good. By saying "1/3 of US Homes Cost More to Build Than They're Worth", they imply: 1. For new homes that are investments, the current price is too high compared to their intrinsic worth. 2. For new homes that are built to be lived in, somehow the marginal benefit derived by the owners has now dipped below the cost to have built it. Dang. Of course, [2] sounds ridiculous. So the third of homes they are referring to must all be investments. They want to say house prices are going to keep falling because its still too high, and that no one is buying new homes, so fewer people will build them. What happens if no one is building new homes? Supply is reduced... What happens then is now left as an exercise to the reader.