The real estate bubble is over

[Nords]

I don't know what will happen one way or the other.  Prices seem way too high.  But I look around at my generation (mid 20s) and I see things that could keep it going.  Literally everyone I know is (or plans to be) a dual income family.  I don't know any couples where the wife plans to be a stay at home mom (or the husband a stay at home husband).  Some may want that after they have children.  But their purchases now (real estate included) will prevent that from being an option.  As a child, at least half of my friends moms stayed home, and these were mostly middle/upper middle class people... dad a doctor, lawyer, businessman etc, wife stays at home with the kids.  When you make the leap to both parents working, there is a lot more disposable income.  Two 30 year olds each making around 80k-90k all in, that's 160k-180k per year.  Plus 50k in down payment help from one set of parents, or both, and suddenly a 500k "starter home" becomes very "affordable".  My parents were each one of 6 children, and couldn't expect much help from their own parents.  I am one of 2.  My friends are one of 1, maybe 2, and I think one friend is one of 3.  Resources are much more concentrated.  Anyway, this is what I have seen among my friends and the people I spend time with.  Prices do seem to be too high.  But there are other trends at work here beneath the surface, changing some of the fundamentals.

For an interesting perspective on these "short-term" trends ("only" 50 years) read "The Way We Never Were" and "The Two-Income Trap".  

Parental lifestyles in the '50s largely rested on being white and on being in one of the few economies that wasn't destroyed by WWII.  

Dual-working couples have been around for much more of the 20th century than the stay-at-home moms of the 50s, and today's couples are using their earning power to bid up the prices of homes near good schools in nice kid-friendly neighborhoods.  The problem arises when a two-income couple has a mortgage payment that's more than 50% of their incomes... and one of them loses their job.

 

[perinova]

Well yes... Afluenza in other words.

Dual-working couples have been around for much more of the 20th century than the stay-at-home moms of the 50s,

I will not agree with you here exactly.
First of all staying at home moms (or dads) ARE working. In most cases anyway. They are allowing the other spouse to earn more by working longer hours or by having a more involved high paying job. Such as the one you can't possibly help out with home/kid chores.
Secondly I don't know what societies you are refering to when you say that prior to the 50s women were working for any kind of income? If you give me examples I will be ready to change my mind but I don 't see any right this minute. In Europe or early America, probably Japan, China too, womer participated in the life of the family by shring burden most often related to tending to the good functioning of the home while men were out there doing the other stuff. It was like that in colonial America, Ancient Greece, Rome you name it.
This only changed with the Industrial revolution. Women (and back then children too ) started to work in factories. The 50s suburbia stay at home mom was a sign of wealth but was it widespread in the society? (?). And then well, yes, people got afluenza, credit cards, oversized homes, forgot to save and started to watch commercials on TV.

 

[Nords]

Well yes... Afluenza in other words.

I  will not agree with you here exactly.
First of all staying at home moms (or dads) ARE working. In  most cases anyway. They are allowing the other spouse to earn more by working longer hours or by having a more involved high paying job. Such as the one you can't possibly help out with home/kid chores.
Secondly I don't know what societies you are refering to when you say that prior to the 50s women were working for any king=d of income? If you give me  examples I will be ready to change my mind but I don 't see any right this minute. In Europe or early America, probably Japan, China too, womer participated in the life of the family by shring burden most often related to tending to the good functioning of the home while men were out there doing the other stuff. It was like that in colonial America, Ancient Greece, Rome you name it.
This only changed with the Industrial revolution. Women (and back then children   too ) started to work in factories. The 50s suburbia stay at home mom was a sign of wealth but was it widespread in the society? (?). And then well, yes, people got afluenza, credit cards, oversized homes, forgot to save and started to watch commercials on TV.

Perinova, perhaps you should consider reading the book before you challenge the points the author's trying to make.

 

[perinova]

Well - I am not challenging the other claims you mentioned just this thing about dual-working couple.
Anyway which one is good to read? Probably "way we never were" ?

 

[Nords]

Well  - I am not challenging the other claims you mentioned just this thing about  dual-working couple.
Anyway which one is good to read?  Probably "way we never were" ?

They're both good. It doesn't matter which one is read first.

 

[gtmeouttahere]

"since the 1950s...prices simply correlate with inflation and construction/replacement costs...but this increase is coming from rising land prices, not from rising construction costs...land prices can deflate rapidly in a slowing market" ~~dent commenting on robert shiller's book irrational exuberance.

It's coming from both.  Land prices in our area (pacific northwest) have skyrocketed (almost doubled in a year) and cost of construction is way up as well.  This seems to be attributed to the boom in our area and everybody wants a piece of the pie, including the government.  Cost of some building matierials have doubled and even tripled in one year.  Just for example, electrical conduit for underground power rose from about $14 for a 10 ft section now cost upwards of $40.  People are making every excuse in the book for charging exuberant prices.  One of the biggest being cost of fuel. 

Right now, it is hard to justify the prices on the land or the building materials.  The cost of building + the cost of land + county permitting fees has now come to the point of almost breaking even on equity or even worse (that being said, the way prices are going up, by the time you are finished constructing your home you will be in positive equity).   That is how rapid the movement is.

So it is hurting new construction in a market already short on housing and even shorter on affordable housing.  It is not uncommon for new construction to cost anywhere from $150-$200 a square ft. So that is also a contractors build up.  Because just a couple years ago, high end construction was about $120 a square ft.   Right now that will buy you a basic "cookie cutter" home with some extras.

All of this combined has caused the cost of homes to skyrocket.  And greed is starting to take over.  However, it is still WAY cheaper to live here that in Seattle or almost anywhere in California and the job market is good so people keep buying at record prices.  No idea how long this can continue...but then again I've been saying this for 5 years now...

 

[lazygood4nothinbum]

gtmeouttahere, thanx for the input. interesting numbers. i really hadn't followed costs that closely in the last year or so. i recall a past tenant of ours who was building a 5,000 sf waterfront house was paying $200 sf and i believe that included the gc's profit. i saw the house; it is gorgeous. but now that i think more that might be 18 months ago already. (time sure flies when i don't know what i'm doing.)

also after reading more (from this forum) on this harry dent guy and looked closer at his book--which i thought was current when i spotted it at the bookstore--it turns out the book was only revised 2006 but really was written in 2004. so i can see now where your numbers and the previous poster make more sense.

construction cost is actually a big factor in an upcoming decision of mine and even at $200/ft i'd be nervous. i've got a property worth about $1.4-1.5ish with a very nice teardown on it. we are considering putting on a new house to sell but we'd have to build 5,000 sf minimum in that market.

the newest house on our block soon to be finished is over 8,000 sf. problem is there's a recently finished 5,500 sf that just sold for $2.75 million. and there's a 6,000 sf one for sale for $2.9 so even at just $200/sf and even with family construction ties, i don't know that we'd profit much more than just selling a vacant lot. when i factor in what we'd be paying on taxes & insurance between getting the c/o on the house and its sale, well, that's just scarey.

anywaze, just read article in biz week suggesting the bubble isn't quite over yet. http://tinyurl.com/lssdx

Associate Editor Toddi Gutner spoke with Youngblood about his upbeat view and his surprising prediction that the greatest price appreciation will be coming in so-called bubble markets

 

[gtmeouttahere]

gtmeouttahere, thanx for the input. interesting numbers. i really hadn't followed costs that closely in the last year or so. i recall a past tenant of ours who was building a 5,000 sf waterfront house was paying $200 sf and i believe that included the gc's profit. i saw the house; it is gorgeous. but now that i think more that might be 18 months ago already. (time sure flies when i don't know what i'm doing.)

also after reading more (from this forum) on this harry dent guy and looked closer at his book--which i thought was current when i spotted it at the bookstore--it turns out the book was only revised 2006 but really was written in 2004. so i can see now where your numbers and the previous poster make more sense.

construction cost is actually a big factor in an upcoming decision of mine and even at $200/ft i'd be nervous. i've got a property worth about $1.4-1.5ish with a very nice teardown on it. we are considering putting on a new house to sell but we'd have to build 5,000 sf minimum in that market.

the newest house on our block soon to be finished is over 8,000 sf. problem is there's a recently finished 5,500 sf that just sold for $2.75 million. and there's a 6,000 sf one for sale for $2.9 so even at just $200/sf and even with family construction ties, i don't know that we'd profit much more than just selling a vacant lot. when i factor in what we'd be paying on taxes & insurance between getting the c/o on the house and its sale, well, that's just scarey.

anywaze, just read article in biz week suggesting the bubble isn't quite over yet. http://tinyurl.com/lssdx

Well, have you considered building a smaller, well put together home?  Probably would do well in that market for resale value ie..someone looking for a nice home in that community and at the right price should sell faster.  Granted that you may not get the same figures as some of the bigger homes but I'd be willing to bet you would be close.  Bigger doesn't always mean better, not everyone wants a McMansion.  Build a well layed out 3500 sf home or maybe even smaller and spend some money on the landscaping/exterior features and it will go a long way.  Plus landscaping is cheaper than price per square ft of a home, but does much more in terms of dollars spent to value.  Curb appeal does wonders. 

Of course this is all a mute subject if there is a minimum square footage requirement in your development. 

That being said, being your own contractor is not a bad option and it can save you a ton of money depending on if you have the time to put into it.  Use your network and you'll probably be suprised at how many people you will have for subcontractors and them subs will know other subs and so on (it sounds like you have people in the family).  But it sounds like you have some amazing equity in the lot.  I would love that situation.  Hard to think you could lose.  What could go wrong right? With people you know in the business, I think it will cost you considerably less than $200 a square ft. There is a HUGE markup in that price. I wouldn't hesitate with your resources but thats just me. Do some research with your resources and get an idea of what it would entail and some ball park figures if they were to build for you. That will give you another perspective.

Honestly I could write a book on this and it is definately in my arena, but there isn't enough space on this forum, trust me.

If you have any questions though I'd be happy to answer....

 

 

[macdaddy]

"construction cost is actually a big factor in an upcoming decision of mine and even at $200/ft i'd be nervous. i've got a property worth about $1.4-1.5ish with a very nice teardown on it. we are considering putting on a new house to sell but we'd have to build 5,000 sf minimum in that market."

Why not just tear down the house & try to sell the land as-is? My experience (mostly in Annapolis MD waterfront) is that there are many more buyers for empty lots than there are empty lots for sale. No matter how you build the house, you will end up alienating a good number of prospective buyers who don't like the design you have chosen. And on the route there, you take on all the risk: the time to build, the carrying costs, the insurance, the risks of new construction, etc. If you put it on the market and it doesn't move at all, then maybe you need to build a house on it. But if you take a lot for 1.4-1.5m, that probably means you want a house in the 800k-1m range, so you are at a total price of 2.2-2.5m. You've started to get into the range where people can afford "anything" and have particular tastes. A lot of these people like to buy lots and build their own homes, from what I have seen. Someone else may disagree with me.

 

[laurence]

San Diego has been tanking for a while, about a year ago my house would have sold for $580,000 and now I see my house for sale for $530,000. They are asking that, and probably getting $515,000. I have more than one friend who just had their super deal ARMs get "corrected recently, and are paying $400+ more a month because of it. Those who had it on a second home/rental are trying to sell fast, those who have it on their primary residence say fancy feast is better than kibbles they are getting creative.

 

[gtmeouttahere]

Macdaddy, that may very well be a good option but I would have to hear more details before I could make an educated decision.  He probably will know best.

But, there is another option...He could pick out a set of plans, get a bid, and offer the entire package as a pre-sale.  That way he'll have a buyer before he starts construction, limiting his risk but maybe even his gain.  Because in my experience, the buyer will know at the time what the layout is and will have some say in the construction.  This can be appealing.  Usually a pre sale is also priced a little under value so the prospective buyers know they will be starting off with a little equity.  That can also be a good selling point.

That being said, there are buyers for almost any concievable market situation.  It will essentially be up to him what needs to be done.

Also, is there any way you would consider living in it for a couple of years?  That will give you up to a $500,000 profit at a 0 capital gains rate.  That in itself would be a pretty nice savings/shelter.

 

[Maximillion]

$200 a sq.ft is what is charged up here, plus land has doubled.

Development charges, Town charges etc have also gone way up.

 

[macdaddy]

"But, there is another option...He could pick out a set of plans, get a bid, and offer the entire package as a pre-sale."

Sure, great option. Often developers will have a piece of land for sale and will cut you a deal on it if you agree to build with them. It sounds like it would be worth talking to some developers in the area. (They are also often in touch with people who are searching for land on which to build a dream home.) I would be curious as to what makes the land valued at 1.5m. Lots of acres? Lake or waterfront? That helps decide how to market it.

 

[MooreBonds]

while every market/buyer is different, I would tend to agree with the comment about empty lots being a superscarce premium.

Look around your neighborhood - how many vacant lots are there? When you get to the price point of $1M for land, and a $1M house, it does start to get to the point of being where they can afford 'almost anything'.

However, some people don't like buying empty lots and dealing with all of the hassle of finding an architect, builder, etc.

How about talking with a builder that would be interested in bidding to the landowner to build their house, and simply marketing the lot as "bring your own design, or use XYZ Builder's Design"? That way, the buyer won't be forced to buy the design/plans from the builder if they don't like them.

I'd suspect that your lot would be one of the rare few vacant lots. That, and if you can walk with a 'guaranteed' $1.2+, simply throw it in a short term CD and earn the guaranteed gain without going through the hassles, stresses, and anxiety of building a new house and trying to hurry up and sell it before the bubble bursts.

 

[lazygood4nothinbum]

you are all hitting on exactly the same points pivoting my brain as i try also to understand the many financial ramifications which so many of you seem already adept. much like the rest of life, inheritance doesn't come with a manual. to that end i am also reading (as suggested by nords and others on this forum) bernstein's four pillars of investing and am just now learning about risk. what a nerve racking part of investing. why can't we just trade in sea shells and call it a day?

the property is deep waterfront in & surrounded by very high-end area, built in the 1960s (i have the original brochures which i'll donate to the historical society in mom's memory).

existing structure is a 3/2 of about 2500 sf, pool & dock, updated over the years, in excellent condition and would sell for 1.4 by owner likely in one or two heartbeats. i've been checking realtor.com for sale price averages. over the past half year the average price of stuff on the water in this zip code has run $4.5-6 mil as there's an even pricier area just nearby. ya, i know, it's just a little nutz. and the numbers have been going up, i suspect, as more finished houses come to market. inventory has not increased here since the so-called bubble supposedly busted.

every house--as far, as i can tell, without much exception--that has been sold during the past 5-10 years has been torn down. the smallest new home i've seen go up is about 4,800 sf built about 6 years ago. all the rest are over 5,000 sf. building a smaller house is not a viable option.

my brother has a gc license and owns & operates the engineering firm built by my ol'man, but he is not a builder. we have friends who are builders, who are making tons of money and have offered their services.

so while i know we can get just about the best deals possible on labor and materials i am having trouble assessing the risk involved.

though my brother would like to retire (actually he'd like to teach kids), he still does have a company working him hard but making him lots of money. this property is the largest part of my inheritance and if i don't do this right, well, i'm screwed.

so all else being equal, there is a lot more risk for me than for him. though as we would have equal equity, i wouldn't gain any, relatively, from that added risk, so much for the 2nd dimension of pillar number 1. if this venture is more risk for me then it is for him, how come i don't get more profit? well, maybe just three pillars is more stable anyway.

i appreciate very much all the imput. sorry if i hijacked a thread, i thought i was just commenting on the subject at hand. gtmeouttahere do not be shocked when i take you up on that offer for more advice as i further study this opportunity of my lifetime.

 

[tryan]

I'ld dump my existing house - tax free - then live in Mom's pad and give the good life a try. If it doesn't "work out" ... sell it largely tax free as is after 2+ years.

Might save more by selling tax free - and risk free - than if you develop it and pay capitol gains on the whole wad.

 

[Scrapr]

Beware building a spec house. Builders do it year around, many times and still get rolled. There are a ton of things that can go wrong. I have linked a story of a guy in construction (truss plant). Almost everything that could go wrong did. At exactly the wrong time.

http://forums.taunton.com/tp-breaktime/messages/?msg=73788.1

Can you do a spec and make money? Of course. But it is a lot of work. Even if your family is in da biz. I built my first house almost 20 years ago. Selected a builder on the next one. One of the best decision we ever made. Way less hassle. I am in construction. Have or could get contacts for most any service. And there is no way I would build a 2 mill spec house. Can you afford to move in and live in it?

ps...
be nice to the Breaktime people. They are a good bunch. But they can be a little hard on noobs

 

[cute fuzzy bunny]

Wait until you see the per square foot construction costs on a house that isnt half built by immigrant workers...

 

[youbet]

Yeah, I know it's expensive, but I still prefer a full built house. Walls, roof, everything. Otherwise, I can never decide which half to leave out.