The low-income, government funded housing I work with is as high quality as most seven figure homes.

Not talking material, talking fit, finish, low / no warranty costs, durable materials, energy-efficiency and such.

But the price paid is something the open market would not tolerate.

As you well know, its just not that simple of comparing numbers of 1983 to 2023. Its not rocket science, but you can damn near make it such.

Tex117 said:

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Agthatbuilds said:

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Tex117 said:

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SockStilkings said:

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You can blame the builders for building it, the communities for allowing and supporting those solutions but the overall blame is really on the consumer for demanding it.

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The builders were building houses that reflected the artificially depressed interest rate that allowed the average consumer to afford homes that would otherwise put them in the formica countertop world. (And builders were making more profit).

This is not unlike when colleges up their tuition when they know that students can get higher loans.

Consumers clearly are going to seek the best they can get with their money. They could get more when the interest rates were low. And that is what is reflected. Should expectations change to reflect the current market? Yes, but those expectations should also be reflected by homebuilders (and their margins) and sellers. The market will ultimately settle all this out. But its going to take awhile. Real Estate always seems to lag behind the rest of the economy.

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Yep. It's wild, I haven't seen this in 10 or more years.

I keep telling everyone to squirrel away their checks and not buy any new tools they don't need. I gave an electrician a check Friday and he said he hasn't set a tpole in 3 months. Got a plumber with 8 roughs going right now. A framer that has 2 frames dropping in the next few weeks.

I think the bottoms going to drop out for a bit. I feel bad for these guys but I know that unless the decision makers in the big production companies get impacted personally then we are going to keep going with high prices and low inventory. It may be better in the long haul but it's probably going to suck soon.

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Question for our homebuilders. Why is homebuilding slowing down? If there is a supply issue, isn't there a market to build new homes?

Or is it that with the interest rate being so high, the builders margins and risk or just too low?

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There are not enough people who can afford to buy the home.

I dont build production homes. I build purely high end custom homes, so I cannot say why or what those production builders do or don't do. I know they've canceled many a homes because of market conditions.

I can tell you on the custom side, it's a cost problem. Inflation in the materials, and especially the labor, have eaten up margins. There's not a lot of ability to raise prices without pricing oneself out, in my experience. That 1.5 million home from 2019 is now 2.25 million or more.

Materials, save lumber, have either leveled out or continue to increase in cost, not come down. And labor remains extremely high. We build on the 500/sqft low end to 800/sqft high end sort of pricing and that market has shrunk considerably and turned into more remodels.

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I was hoping you would respond. So, to summarize. At least with your end of the market, its a matter of increased costs to build (labor, materials, etc.) that if you completed the project, would put you in too high of a price?

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Yeah, that's about it. I dont do spec homes, so I don't buy lots and build a house for a prospective buyer. We only build for clients who already own the lot and have a set of complete architectural plans or are working through them.

Here's a good example-

We have a house we're building that pre covid would have probably been about 1.1 or 1.2 million. Not an overly large house but decent at around 28-2900 conditioned sq ft. That house is now 1.8. The city took 16 months to permit it and the client's interest rate went from about 4.5% to 6.5%.

So for the client-

They bought an old house and lot and tore it down- probably about 500k
Paid an architect- probably about 150k
And now are building for 1.8.

And this house is relatively bare bones to what we would normally do.

The build cost of homes is just so high and it's due to huge inflationary pressure in labor and materials.

My problem is that when I try to increase my take on the projects to adjust for our own increased costs, we price ourselves out.

There's a segment where the money just doesn't matter, but, I haven't yet crossed over into that territory.

Pre cobid we could do a "normal" custom home for 250-350/sq ft. Now, we're at 350/sqft for a super basic, everything is perfect with the lot home- to averaging about 525/sqft and can push up to 700 pretty quickly, depending on the details

Agthatbuilds said:

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Pre cobid we could do a "normal" custom home for 250-350/sq ft. Now, we're at 350/sqft for a super basic, everything is perfect with the lot home- to averaging about 525/sqft and can push up to 700 pretty quickly, depending on the details

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Construction costs? Or what you are charging to the end product at retail?

fka ftc said:

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Agthatbuilds said:

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Pre cobid we could do a "normal" custom home for 250-350/sq ft. Now, we're at 350/sqft for a super basic, everything is perfect with the lot home- to averaging about 525/sqft and can push up to 700 pretty quickly, depending on the details

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Construction costs? Or what you are charging to the end product at retail?

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That'd include all construction costs, including the builder's fee.

I'm shocked every time I price a project, to be fair.

$700/sf better come with lifetime supply of hookers and blow. If so, I remain interested.

And we're pretty "cheap" relative to our peers

I can provide a practical example of my recent fairly high-end build on my rural property where I owned the land and used a well-regarded architect for design. All numbers do not include the land, architect, utilities or grading. My high end builder agreed to do a cost plus fixed fee (not fixed percentage) contract. Builder got the bids from his subs in October of 2020. He/I locked in almost all pricing/bids including lumber, framing, steel roof, masonry (all rock), surfaces, appliances etc.

We poured the slab in December 2020. All contractors and suppliers agreed to honor their bids…even though there was a bit of understandable moaning as we went along . The 4,500 SF home came in right at $1M. We moved in late January of 2022.

I got insurance quotes in late December 2021 from two insurance companies who both quoted the replacement cost at $1.5M for what I just paid $1M for. I thought I was being taken and had them hire new replacement cost appraisers….they also came in at $1.5M as well. Then talked to my builder and after laughing, he confirmed that he would have to charge $1.6M to duplicate the home as built.

So….full up labor, materials and fees increased about 50% in the span of about 15 months on a fully custom, pretty high end finish. That was my experience.

Seems very reasonable from an experience perspective (though still a shock in that increase).

In our area, most prices went up 50% over that period and at that price point.

Lot of my bids now come woth a 10 day hold

fka ftc said:

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Tex117 said:

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fka ftc said:

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Still way underhoused but some of the slowdown is from builders having expensive lots to get through. Some builders may have to abandon those lots and they will be repriced and resold.

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For the bolded, are you saying builders are not building now because they purchased lots at a high price, and they can't build on it for fear of the overall cost being too much for the market to afford?

I, very much admittedly, don't know about the homebuilding market. But aren't we really talking about the chicken or the egg? The market could demand more house because interest rates were so low and builders could build those houses as the market could support it. Wouldn't builders be happy to oblige that as that would increase their profit and margins? Just curious. I have no idea how it works on a nuts and bolts level other than "money is cheap, can buy more and can build more. Money expensive, can buy less can build less."

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Then you will see the end price of house drop and demand, pace of building pick right back up.

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Are you saying that once the expensive lots work through the system, building will pick back up?

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For the bolded, are you saying builders are not building now because they purchased lots at a high price, and they can't build on it for fear of the overall cost being too much for the market to afford?

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Absolutely. Happens in every downturn. Not unlike forward-purchase commodities like oil, electricity, etc, builders buy lots from developers (or buy land to develop) and those are priced by the seller at that point in time (roughly). The builders / developers are left to hedge whether they can turn that dirt into a completed home to close to a buyer at a price the market will enjoy.

So builders who withstand the downturn make hay on cheap lots and lower prices, then increase their prices hoping got that sweet spot of low priced lots, high home prices and as the market matures that equation reverses. At a certain point, builder / developer either goes bankrupt (and the land / lots are discounted) or they sit on the lots (supply tightens but builder will not build at a loss, unless they prefer the previous option of brankruptcy).

Homebuilding cycles are sort of fascinating and follow much longer trends than interest rates and labor / commodity prices.

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Makes sense....and yeah. Definitely interesting.

DP

Just. Wow.
Man..wow. Im definitely getting my answer on why builders can't just "build to capture the market." The answer is seemingly, its too expensive right now.

What does a builder in this situation's debt stack usually look like? As in, I assume they're not cash buyers for the dirt, right?

I dont want to overly bias you. I'm in what I would consider a niche market.

The guys who build spec home can build for less than 250 sqft and many less than 200. This is austin, BTW. Our product is very different than theirs.

And the production builders build for less than that but the market sets the rate for their homes and they can help control that market by increasing or decreasing the number they build every year.

Here's an analogy:

Production builders build Kia souls
Spec builders build Hyundai elantras
Semi custom/build on you lot guys build Camrys
We build high end bmws and Mercedes, with the occasional Maserati or lambo
Others build lambos and Ferraris
Some build Maybach

We need more souls, elantras, and camrys.

ThunderCougarFalconBird said:

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What does a builder in this situation's debt stack usually look like? As in, I assume they're not cash buyers for the dirt, right?

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Man, it really varies wildly. Even the biggest builders have MPCs of their own, small communities of their own or just as likely to be in with a developer.

Lots will be under contract with some obligation to draw down and with some "earnest" money at risk should they walk the deal.

If I were a betting man, at this point in the market I would hold on to my chips and be looking for VDLs in the next 18-24 months. But that is not a solid bet in Texas (and Florida - I will compare the two as I am most familiar with) as the underlying demand remains solid.

If you want to be a real gambler, I would look at the nhoods that fit into the category of "awaiting regentrification". And not high-end tear-down rebuilds. I am talking go to older parts of a mid size community (let's say B/CS) and look for opportunities where the schools may be smaller but do not suffer from long term poor performance.

So, could someone make money in Snook, Franklin, Wellborn? Probably. Could make a killing. My favorite... Hearne. Yeah, I would still take a pass but keep it on the 10-year radar.

They are not printing more land except in Hawaii and Dubai. Americans seem to naturally be opposed to true urban high-density - this thread shows that.

Respect the caveat. You are indeed in a niche and a nice one at that. But I just want to say I respect your honesty in providing your perspective on what is going on in the market.

Do you add a contingency to the budget? On contracts without builder contingency we're adding it and have for 2+ years. I would say in 90%+ of those builds the contingency ends up being needed.

Yes. We've also had some bank require upwards of 10% contingency minimum

Agthatbuilds said:

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Try building a home in Central Texas right now

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How bad are we talking? Even awful on your own lot?

We require 5% if there's no builder contingency. The soft costs are staggering too - architects, etc.

Obviously we're talking about something different than walking into a builder model in a production subdivision.

Sorry I don't follow you on the 5%


5% down payment toward construction loans? Something else?

jja79 said:

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Being involved in financing high end custom homes I have the opportunity to review a lot of budgets and it's astounding to see what cost $1-2-1.8MM 3 or 4 years ago now costs 1.8-2.8MM. In the past there were a significant number of thiese customs that came in under $1MM on construction budget but that's almost impossible now.

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I've always wondered who buys these homes? Even top 1% DINK doctors, lawyers, executive etc don't seem like they could finance a house that expensive. 10-15k a month on the low end? Is it cash buyers exclusively, rolling massive equity over into a new build?

I feel like my family's finances are finally in a good place but I'll never be able to afford a nice house because they appreciated 50%+ in the last couple years lol

Contingency not down payment. If the budget is $1MM it becomes $1,050,000 is the simple answer.

I'm sure there are lots of cash transactions but you would be surprised at the number of people that can qualify and finance these projects. I've been doing it a long time and I'm astounded at the 30 and 40 somethings that do this with no problems.

jja79 said:

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I've been doing it a long time and I'm astounded at the 30 and 40 somethings that do this with no problems.

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But what do they do for a living?

Agthatbuilds said:

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I dont want to overly bias you. I'm in what I would consider a niche market.

The guys who build spec home can build for less than 250 sqft and many less than 200. This is austin, BTW. Our product is very different than theirs.

And the production builders build for less than that but the market sets the rate for their homes and they can help control that market by increasing or decreasing the number they build every year.

Here's an analogy:

Production builders build Kia souls
Spec builders build Hyundai elantras
Semi custom/build on you lot guys build Camrys
We build high end bmws and Mercedes, with the occasional Maserati or lambo
Others build lambos and Ferraris
Some build Maybach

We need more souls, elantras, and camrys.

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Then why don't more builders more into that space? Not "exciting" enough? Need more volume to turn a profit? (more like commodities)?

And why is Austin right now so difficult to build in? (I have theories, of course, but want to hear yours).

Good news.

30 year fixed rate dropped by most in 16 months.

It's now average of 7.61% per MBA.

Yahoo is the source.

Consulting. Honestly I've seen everything from JD, MD, engineer, sales, it's all over the board and a good reminder I have been a failure.

Tex117 said:

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Agthatbuilds said:

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I dont want to overly bias you. I'm in what I would consider a niche market.

The guys who build spec home can build for less than 250 sqft and many less than 200. This is austin, BTW. Our product is very different than theirs.

And the production builders build for less than that but the market sets the rate for their homes and they can help control that market by increasing or decreasing the number they build every year.

Here's an analogy:

Production builders build Kia souls
Spec builders build Hyundai elantras
Semi custom/build on you lot guys build Camrys
We build high end bmws and Mercedes, with the occasional Maserati or lambo
Others build lambos and Ferraris
Some build Maybach

We need more souls, elantras, and camrys.

---

Then why don't more builders more into that space? Not "exciting" enough? Need more volume to turn a profit? (more like commodities)?

And why is Austin right now so difficult to build in? (I have theories, of course, but want to hear yours).

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I think most builders are just that, builders. Most probably want to focus on the construction aspects of the industry.

Scaling up to build neighborhoods can be capital intensive and to do it profitably, I suspect you have to have one, if not both feet in the developer world. Land acquisition, environmental remediation, utility/infrastructure planning, PID formation, large scale earth contouring, lot subdivision, etc., then once you actually build the houses you need to own a share of the lending and title companies….

It's probably easier to move up market into higher margin luxury homes than it is to take market share from national builders like DR Horton, Pulte, Lenar, David Weekley, etc…

jja79 said:

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Consulting. Honestly I've seen everything from JD, MD, engineer, sales, it's all over the board and a good reminder I have been a failure.

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LOL! Same here buddy.

lb3 said:

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Tex117 said:

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Agthatbuilds said:

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I dont want to overly bias you. I'm in what I would consider a niche market.

The guys who build spec home can build for less than 250 sqft and many less than 200. This is austin, BTW. Our product is very different than theirs.

And the production builders build for less than that but the market sets the rate for their homes and they can help control that market by increasing or decreasing the number they build every year.

Here's an analogy:

Production builders build Kia souls
Spec builders build Hyundai elantras
Semi custom/build on you lot guys build Camrys
We build high end bmws and Mercedes, with the occasional Maserati or lambo
Others build lambos and Ferraris
Some build Maybach

We need more souls, elantras, and camrys.

---

Then why don't more builders more into that space? Not "exciting" enough? Need more volume to turn a profit? (more like commodities)?

And why is Austin right now so difficult to build in? (I have theories, of course, but want to hear yours).

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I think most builders are just that, builders. Most probably want to focus on the construction aspects of the industry.

Scaling up to build neighborhoods can be capital intensive and to do it profitably, I suspect you have to have one, if not both feet in the developer world. Land acquisition, environmental remediation, utility/infrastructure planning, PID formation, large scale earth contouring, lot subdivision, etc., then once you actually build the houses you need to own a share of the lending and title companies….

It's probably easier to move up market into higher margin luxury homes than it is to take market share from national builders like DR Horton, Pulte, Lenar, David Weekley, etc…

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That is absolutely consistent with what Agbuilders is saying and why there aren't the "Kia Soul"/ "Camery" builders.

Tex117 said:

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Agthatbuilds said:

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I dont want to overly bias you. I'm in what I would consider a niche market.

The guys who build spec home can build for less than 250 sqft and many less than 200. This is austin, BTW. Our product is very different than theirs.

And the production builders build for less than that but the market sets the rate for their homes and they can help control that market by increasing or decreasing the number they build every year.

Here's an analogy:

Production builders build Kia souls
Spec builders build Hyundai elantras
Semi custom/build on you lot guys build Camrys
We build high end bmws and Mercedes, with the occasional Maserati or lambo
Others build lambos and Ferraris
Some build Maybach

We need more souls, elantras, and camrys.

---

Then why don't more builders more into that space? Not "exciting" enough? Need more volume to turn a profit? (more like commodities)?

And why is Austin right now so difficult to build in? (I have theories, of course, but want to hear yours).

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You need volume, lots of volume. You need a very good cash flow operation. You need to very cheap subs. You need cash to buy lots, front the build costs, market the land/house, pay the realtor, pay the designer.

I know guys who do it, but they are all in smaller towns where it'd be considered more semi custom than production

In short, more builder don't get into that because it takes a lot of cash and debt to start it up and volume is needed because the margin will typically be smaller.