Paying for Dirt: Where Have Home Values Detached from Construction Costs?

https://www.buildzoom.com/blog/paying-for-dirt-where-have-home-values-detached-from-construction-costs

by erwtuif • 9 years ago

123 116 9 years ago

buildzoom.com

rb8083• 9 years ago

Lol they should do this for London, where 150 year old tiny apts cost millions.

asah• 9 years ago

...or beachfront property in (say) Santa Cruz. It's like a Mastercard ad:

  simple beach bungalow..   $300,000
  dirt and parking....... $3,000,000
  35 steps to the sand... priceless

chrisseaton• 9 years ago

150 year old tiny apts

Tiny is bad, but what's wrong with old?

I find older houses are usually built to a much higher standard (may just be those that remain but that's irrelevant), and have much more character.

Spearchucker• 9 years ago

Build quality in the UK is generally dire. Mortar and bricks of old buildings crumbles. Lots of asbestos. Leaky pipes cost too much to fix, electrics are old and a hazard... New buildings favour low cost over quality. Staircases crack away from walls 12 months in. Insulation is designed to meet green targets, but not to actually insulate. Compared with the standards-obsessed Germans, I suspect many buildings in the UK should really be demolished. It's but one of the reasons I'm selling up in London and moving to the mainland.

TACIXAT• 9 years ago

You miss out on a lot of modern advancements. A few things that come to mind from my lovely house:

* Single pane windows that leak heat / cool, also that rattle.

* Lack of insulation.

* Non-grounded wiring / unsafe wiring.

* Plaster instead of drywall, cracks very easily.

* Old heating systems (oil furnace with steam radiators).

* Crooked doorways and doors that don't close quite right.

rb8083• 9 years ago

Nothing wrong with old. Just that its related to the OP - construction costs are irrelevant when you can amortize the cost over a century or two.

liveoneggs• 9 years ago

for a lease hold instead of actual ownership too

pxeboot3• 9 years ago

I got sick of living in a HCOL area and moved somewhere super cheap. Put 20% down on a nice house and have a $500/month mortgage payment. My total annual housing expenses are less than the taxes on a similar house in Seattle or San Francisco.

Pay is less on paper, but actually quality of life and savings are much higher.

toomuchtodo• 9 years ago

And you'll actually get to retire!

lostmsu2• 9 years ago

Where did you move to? I'm looking for a good area like this with the biggest requirement of having fiber or otherwise just a very good 250Mbps+ service.

emodendroket4• 9 years ago

I don't know where he went but I've occasionally thought about Raleigh or Chicago as like, way cheaper than Boston, where I am.

rayiner2• 9 years ago

If you can telecommute a lot, I recommend Maryland b/w D.C. and Annapolis. You can get a 4BR house for what a 1BR apartment costs in D.C., you can be at a farm in 20 minutes in one direction and a downtown bar in 10 minutes in the other, and I've got two different fiber providers available (I'm getting 2-gig installed soon). Unfortunately, the tech scene in the DMV area seems to be mostly in northern Virginia, which is probably the most overrated part of the entire country.

pxeboot3• 9 years ago

I moved from Seattle to a midsized city in Texas. Gigabit is available, but expensive.

While my house is by far the nicest I have lived in, most of my neighbors have far larger/more expensive homes. It would have been easy to spend twice as much for more land and square footage, but I am very happy having something we can very comfortably afford.

noahl2• 9 years ago

I moved from Seattle to the Raleigh/Durham area. I absolutely love it so far. Everything is cheaper here, and quality of life is (in my subjective opinion) far superior.

Feel free to ask me more about it.

loeg2• 9 years ago

You got 80% of a nice house for something like 120-140k (guessing at interest rate and term here)? In the states, or a cheap foreign country?

Retric3• 9 years ago

I have seen a nice 4 story house sold for under 60k in the US. It's really all about location, location, location.

pxeboot3• 9 years ago

I did. It is easy to find nice places for less than 200k in Texas. Prices are going up, but still very affordable.

johnvanommen• 9 years ago

I quit my job in Bellevue WA and moved to Oregon City Oregon. Here's some things it has going for it:

5) It has a train station that connects it to every city from Los Angeles to Portland to Seattle via Amtrak

4) Portland's train system doesn't connect to it yet, but it will soon. At the moment, it takes about 15 minutes to get to the city train station.

3) Portland is overrun with homeless people, but Oregon City isn't.

2) The traffic isn't as bad as Portland

1) You can get a nice house for well under $1800 a month. If you can live with a condo, you can get that down to about $1200.

manyxcxi• 9 years ago

I’m in Wilsonville, moved from Seattle (but I grew up in Portland).

One thing that WA has over OR is no income tax. I’d gladly have sales tax again to not pay the income tax.

jackcosgrove• 9 years ago

I did a crude analysis of the effects of density on cost in this thread: https://news.ycombinator.com/item?id=12362684

"Sure. I found this for Canada: http://www.altusgroup.com/media/4099/costguide_2015_web.pdf Toronto (average $/sq ft to build given range) Medium Quality Tract House (assume 1 story): 180 Medium Quality Highrise (50-80 stories, average 65 stories): 270 This comes out to $1.38 more per square foot for each additional story. Let's just assume land will be twice as expensive in the city center as at the edge of that metro. Assume the cheapest land is $200 per square foot. Assume that the house will be built on the cheaper land, and assume one dwelling per story for simplicity. As you add a story, the cost of land is halved. After adding the 65th story, it is divided 65 ways. By adding the linear curve of building cost over the inverse curve of cost of land divided by story, you get the cost per square foot per story. In fact, this is maximized for a single-story building as land costs are born by a single tenant. Cost per floor falls until construction costs overcome the falling cost of land. The minimum cost to add a story, $214.67 occurs for the 12th floor. Again, back of the napkin and very naive. A highrise will probably have less square footage per dwelling though. If we halve that the cost of land falls even faster, with building costs plus land costs bottoming out at $203.51 per square foot, for the 8th floor. Finally, I added an $8,000 per square foot premium at city center. With this, the cheapest floor costs $348.44 per square foot for the sixth floor. So as land prices become steeper from city center to periphery, it actually makes more sense to disperse. Likewise reducing dwelling size does not have as much of an effect as rising build costs."

More than happy if someone can poke holes in it, but my takeaway was that costs are minimized at lower density rates than I first assumed. Mid-rise buildings are the most cost-effective, moreso than high-rises.

I'm glad that the BuildZoom study confirmed my exercise somewhat, but it's still disappointing that sprawl seems to be the best way to make housing affordable.

rb8083• 9 years ago

but it's still disappointing that sprawl seems to be the best way to make housing affordable.

The other alternative is like much of Europe with lots of small cities and towns connected with trains and roads, and zoning enforced farms in-between. Isn't easy to get done in US though where developer $$ rule.

mlinksva• 9 years ago

Midrise can be very dense. Think Paris. So can lowrise. Think rowhouses.

So no, sprawl is not the best way to make housing affordable. Doubly so if you account for transportation costs.

neaanopri• 9 years ago

Do they not have RSS enabled?

0bfus• 9 years ago

Here you go: https://www.buildzoom.com/blog/feed

kevinburke12• 9 years ago

Would like to say: If you would like to reverse these trends, or live in the SFBA and would like to be able to afford a home or condo without needing to commute from Stockton or hit the startup lottery, please pay attention to your local City Council and their zoning/land use decisions. Local decisions frequently don't get that many comments; your voice makes a difference.

- Brisbane may approve 4400 units of housing, or zero. 4400 units would be close to how many the Bay Area typically produces in a year.

- Cupertino and Sunnyvale residents frequently oppose new housing.

- San Francisco has a strong contingent of people that oppose large projects. There is one project near Glen Park BART, and another one with 1200 units at 700 Innes, that could use support in the coming months.

If you're not sure where to get started getting involved, contact me and I can point you in the right place. One good place to start would be to push your executives and VC's to actually work towards making housing affordable here in the Bay Area; for too many it's an afterthought.

innesinnes• 9 years ago

Re: 700 Innes

https://twitter.com/SFyimby/status/921454648044666880

https://twitter.com/SFyimby/status/921438475554918400

TheSpiceIsLife2• 9 years ago

Will building more units / appartments/ houses bring the price down?

Have other cities seen home prices move toward affordability when more housing has been built?

I'm not saying it isn't a good idea, just that the logic seems flawed.

rspeer4• 9 years ago

I'm not up on the sources, but a moderately pro-development candidate for Cambridge City Council has often quoted a statistic saying that there are only two ways to bring down house prices:

1. Make the city suck

2. Get the housing vacancy rate to 5.5%

And of course he says this to encourage everyone to work toward #2, and the way to do that without displacing anyone is to build new housing.

I don't really understand the opposite logic, which the NIMBYs like to use, saying that building new housing will drive the price up.

I mean, I am not some kind of libertarian free-market cheerleader, but it shouldn't be that controversial to say that a market exists, that the way to bring down the price in the face of overwhelming demand is with supply.

People point to how expensive newly-built market-rate housing is, but that's a symptom of the shortage. People want to live in good cities. If there's not a new home for them, they'll pay even more for a home someone lives in, so prices go up and a community gets displaced.

dtech• 9 years ago

Will building more units / appartments/ houses bring the price down?

Ballooning housing prices are a prime example of demand exceeding supply leading to increased prices. Increasing supply will decrease prices or at least limit further price increase.

kevinburke12• 9 years ago

Broadly, yes, for the same reasons that destroying housing (as happened in Santa Rosa) increases competition for existing apartments and increases rents. Here's a report from the state LAO about the effects of building more housing on displacement: http://www.lao.ca.gov/Publications/Report/3345

In 2016 SF built 5,000 units, a record, and rents and owner move-in evictions both fell for the first time in a while. (They are not going to repeat that production in 2017 or 2018, in large part due to Prop C).

Across all 50 states, areas where population growth exceeded housing supply growth saw price increases: https://twitter.com/lenkiefer/status/871785655164182529

Austin, Houston, and Dallas don't have very restrictive zoning or rules around new home construction, and they lap California in home building and have seen rents hardly rise at all.

rsynnott2• 9 years ago

In a rational market, yes, absolutely; if prices are driven by a supply deficit then increasing supply cuts prices (or at least reduces price growth, if a smaller deficit remains).

Housing markets tend not to be all that rational, though; there's often an aspect of speculative mania to them. It's likely that increasing supply would cut prices, but it's not actually certain, as it may just increase speculative 'investor' demand from the "house prices always go up" crowd. The Irish property bubble in the late 90s to late noughties was originally driven by supply shortages, but even as supply started to meet demand prices kept going up for a couple of years due to property "investors" (before crashing spectacularly).

pc86• 9 years ago

It does if the new units surpass demand, even in the short term. If there are 5k available units but there is demand for 15k over the next 90 days, of course building 1500 won't affect prices much, if at all. You need to build until there is some vacancy, then landlords are forced to lower rent to prevent their units from being vacant, unless they have the means to hold out for someone who really wants that particular location.

lg• 9 years ago

home price increases in my neighborhood of manhattan have substantially slowed their rise in the past couple years as a bunch of new construction has come on the market. this will probably continue through next year as stuff in progress finishes up, and then probably rise again because homebuilders don't start projects when prices are flat.

frgtpsswrdlame3• 9 years ago

For a more skeptical viewpoint: http://stumblingandmumbling.typepad.com/stumbling_and_mumbli...

m0llusk2• 9 years ago

The Brisbane proposal is a great example of the need for public input. Instead of expanding the town the idea is to build high density development on swampland far from town and services in a location so clearly undesirable that it has escaped even proposals for development since the Gold Rush. Reasonable expansion of existing towns is a good answer to this crisis while building large apartment buildings in fetid swamps far from transit, towns, and services is responding to one set of errors with even worse errors.

kevinburke12• 9 years ago

"far from transit"

The proposed development is literally next door to a freeway (101), a Caltrain stop - Bayshore Caltrain - and a Muni stop. SF has proposed extending Muni into the new development for free.

"The public" largely wants new housing in the Baylands, if the city meetings were any guide, where a large majority of the speakers wanted to approve the housing proposal. You may have seen the signed letter from 40 different tech CEO's asking for housing on the Baylands, as well. The people who oppose it are Brisbane homeowners, because they have no incentive to add new housing.

so clearly undesirable that it has escaped even proposals for development since the Gold Rush.

The choices are to build an office park and new apartments, or an office park; something is going to get built there. As part of the plan, the developer is proposing to spend $200 million cleaning industrial waste in the area. The only reason that pencils out is because of the new development.

dogruck• 9 years ago

Real estate values have always been rooted in location, location, and location (land).

wheresmyusern• 9 years ago

hey, i'm looking to buy a small plot of land and build a house on it in the next few years. my goal is to be able to have land and a house of my own without taking a loan, or a very big one at least. ive been looking at land in northern california and there seems to be a lot of promising deals. lake county california seems to be a pretty good spot.

if anyone has experience with buying land to settle on, in northern california or otherwise, i would be eternally grateful for advice and tips. in fact, i would greatly appreciate any advice or tips regarding anything that has to do with buying land, building a house, or owning property and a house.

nowarninglabel2• 9 years ago

Check out the book "County Property: Dirt Cheap". It has some good tips.

Note Lake County is high in fire danger, so depending on where you buy you'll want to take that into account for insurance cost or building style. Neighbors are also pretty critical to whether or not you'll be happy with this dream of yours.

boardwaalk• 9 years ago

This is a pretty old book, being >20 years old. I wonder if anyone knows of a good book that takes into account searching via the internet.

clairity3• 9 years ago

i once managed the product that calculated the cost basis for your property tax bill in most US counties & states (and some international jurisdictions), and it was common knowledge there that home prices were disconnected from construction costs.

construction cost relative to home prices is interesting to a company like buildzoom because they're in the construction business (and finding the coming construction booms is important to them), but if you want to understand home price inflation, it's not that interesting at all. shiller, of case-shiller fame, also showed that home prices are disconnected from construction costs in his book irrational exhuberance.

in a stable economy, you'd expect home prices to roughly follow GDP or inflation, not building cost. if you graphed median home prices against GDP, you'd literally see the bubble (between median home price and GDP) starting to form in the 80's and popping in 2008.

why? financial engineering--we turned homes from places to live into investments. greed fueled home price inflation. and real estate investment was accessible to the average american, unlike more complex financial instruments like bonds or derivatives. in classic bubble fashion, people knew (and still know) that prices are irrational, but we all think we can make a boatload and get out before the bubble pops (again).

but these are homes we're talking about, not some abstract concept like a futures contract on the production of black-eyed peas. these are not simple commodities that we can easily replace with a substitute. it's where we live.

and yet, we continue to allow financiers and investors to extract wealth through higher rents (now nearing 50% for many residents of big cities), regulatory capture, and collaterized debt (the risk on which is passed to taxpayers). but "everyone else is doing it" so it's ok, right?

AznHisoka3• 9 years ago

Why should abstract things like a futures contract be investable, while "real" things like houses shouldnt?

I guess the government should recommend bitcoin investing to everyone since its not real and nobody is affected?

clairity3• 9 years ago

it's not so much that real things shouldn't be investable, but that a primary residence has unique properties (lke the lack of substitutability) that make it unlike commodities. and commodities are what capitalistic free markets was design for and for which it works best.

so a free-for-all market may not be ideal for a society when it comes to primary residences. i'd go so far as to argue that the american identity rests on the psychological safety of a reliable place to live (or at least it used to, before we turned them into slot machines).

entrepreneurship couldn't have flourished without it, along with reasonable bankruptcy laws that (until recently) fostered greater risk-taking among the labor class. it's hard to be the rugged individualist if a risk you take can lead to you and your family's death.

carradjm• 9 years ago

https://en.wikipedia.org/wiki/Georgism.

Don't mean to boil down your entire well-written post to a single point, but I maintain that Georgism is the only sensible solution to this problem.

clairity3• 9 years ago

i'm not familiar with Georgism, but i do agree that the land value tax should be a primary taxing mechanism for a property-ownership economic system (like ours in the US). it's progressive, fair, and according to the wikipedia article, doesn't get passed on to renters.

purplezooey• 9 years ago

Densification. Wish we would learn some of that in the SFBA.

dsfyu404ed2• 9 years ago

TL;DR: Proximity to water and density of rich people drive up the cost of land.

It ain't rocket science people.

pascalxus3• 9 years ago

They really should normalize the costs on a per square foot basis and the numbers would be even more start. Homes tend to be smaller in areas with really high per square foot costs.

It just seems so sad. When you're driving along the highway and you see all these tiny homes jam packed together like some sort of Gehtto, only 2 feet between each home and yet there's miles and miles of space in every direction, outside the complex. I'm talking about the exerbs that surround the bay area. According to one govt report i read, Only 5% of CA land is currently being used!

Paying for Dirt: Where Have Home Values Detached from Construction Costs?

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