Costs of Building

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Janet_IHB

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<p>Disclaimer: My questions are not meant to deny any of the current realities, but rather to learn.</p>

<p>There's been a lot of discussion about rental value being the only way to measure value.</p>

<p>I guess what I'm wondering is, what does it really cost to build/remodel for a) a major builder, b) a small builder and c) a homeowner?</p>

<p>Also, what affect does the price of oil/gas have on current costs?</p>

<p>Anectdotally, I have been involved in several building and (major) remodelling projects, and have found it to be very costly when done well. And that's after getting great deals on labor and materials (at least in my opinion). I am very familiar with the amount of work involved in, say, tiling a shower - which I've found to be a lot. This is the reason I am asking.</p>

<p>Tonye has discussed these things at length before.</p>

<p>I have also looked into building from the ground-up before. It was my experience that most good construction was being quoted in the $250 psf range. Mind you, building only - not land. (Do I have a sign on my back?)</p>

<p>Having said that, I've heard some builders can get it done for under $100 psf. Quality? Probably not.</p>

<p>So, how does all this relate to the rental income valuation school-of-thought?</p>
 
Income and cost have no relationship in determining value. Income alone determines value. If cost is higher than value, then the house should not be built. Eventually a shortage will be created which increases income and value to the point where it exceeds cost. Then, and only then, will builders build and add to supply. This is why rural communities often have no construction occurring because the value of existing properties is under current replacement costs.
 
<p>How does a shortgage eventually increase income?</p>

<p>I can understand it increasing employment, but not following how it will necessarily increase income.</p>

<p>What if we can never afford the amount of housing that we actually need? Is that even possible?</p>

<p>Is that the point where we dial construction back to the stone age?</p>
 
<p>Ok - I see. You mean rental income going up due to supply constraints.</p>

<p>But how does that ensure that you could ever get to the point where it exceeds cost?</p>

<p>What if costs continue to increase at at least the same pace as the rental increases?</p>

<p>Sorry if I sound obtuse!</p>
 
"Also, what affect does the price of oil/gas have on current costs?"





Some. Materials suppliers have been tacking on fuel surcharges to their invoices.
 
<p>Right. </p>

<p>Plus it takes a lot of energy at every step in the process, from the origination of materials to the final product.</p>
 
"How does a shortgage eventually increase income?"





Cost of living. If I'm an employer and need talent, I'll either relo to someplace less expensive where I can get talent (e.g., Texas) or I will stay put and pay higher wages to my employees so that they can afford to stay here. Think affordability. When there is a shortage of something, it's price tends to go up - such as a gas or electricity crunch. As the cost of housing (rental or own) rises because landlords/owners can seek the highest price for their goods, income would have to rise to keep people here.





Moreover, just because a person needs housing doesn't automatically mean that they need to buy a house to get it.
 
"Plus it takes a lot of energy at every step in the process, from the origination of materials to the final product."





That relates to the overall price for the good. The fuel surcharges I know of are strictly related to transport to the buyer's destination.
 
"Ok - I see. You mean rental income going up due to supply constraints.

<p>But how does that ensure that you could ever get to the point where it exceeds cost?"</p>

Over time, if someone isn't making enough profit to make them happy, they will get out of the game.





I don't know how often you see Bix' comments in the blog, but he rehabs apartments (or something like that). If a project doesn't make him money, he doesn't do it.





This also explains the TIC advantage in Irvine. They own the land, so their cost basis for each apartment complex is magnitudes of order smaller than Joe/Jane Schmoe who wants to build an apartment complex in Irvine.





If the income plus any tax advantages is less than the cost of a project, the project shouldn't be done. Please note, however, that there are plenty of . . . not so experienced people . . . who might try anyway.

<p> </p>

<p>


</p>
 
<em>"But how does that ensure that you could ever get to the point where it exceeds cost?"</em>





It doesn't, and it may not. If it doesn't the demand is not there to justify new supply, and new product will not be built.

<p><em>"What if costs continue to increase at at least the same pace as the rental increases?"</em></p>

<p>If this occurs, new product simply won't get built.</p>

<p>For example, I grew up in a very small town. Most of the housing stock is from the 50s which was the last time there was an economic expansion there. It has since become a bedroom community to larger towns a reasonable commute distance away, so incomes and rents have risen slowly but steadily for the last 50 years. At no time during the last 50 years has the cost of new construction been justified by the increasing incomes and rents, so no new construction has taken place (a few people have built new custom homes, but no new subdivisions have been built.)</p>

<p>In places like Southern California, the economy is generally strong and grows at a rate greater than the increase in housing production costs. In that circumstance, supply will come into the market any time there is a shortage which causes people to bid up rents or sales prices.


</p>
 
<p>So how does this get solved?</p>

<p>Lasner has a story today about affordability being a national problem, so we can't just say that people will migrate out of places like California.</p>

<p>Could we be looking at a future where housing gets smaller and smaller, and simpler and simpler?</p>

<p>Or does it mean we all rent from just a few owners? Or that we have families sharing housing?</p>

<p>I'm not sure where there's room to give, since it costs a lot of money to build.</p>

<p>Are we just not making enough money in this nation to put a good roof over our heads? Yikes!</p>
 
Janet, if I may be so presumptious as to make a suggestion, I think you may want to reassess want vs. need.





An example: my parents bought a slightly smaller than average home in 1969. It's roughly 1200 square feet in size. My brother and I grew up in that house and my parent still live there. You're probably thinking, "Good gravy! Four people in a 1200 sq foot house? Bleah!" But it worked for us. My parents paid off their off mortgage after 20 years. No, we didn't have a separate room for the exercise equipment, walk in closets, a mud room, a library, an office, or guest bedrooms, but my brother and I each had our own room and front and backyards to play in. Even that was probably more than we needed, and it was plenty sufficient.


As much as I would like additional bedrooms for an office, guests, and exercise equipment in my "dream home," I am also mindful that it's wasteful (of space, electricity, and money) to have rooms that will only be occupied for an hour or so each day (if that).





There was a time when 2000 sq feet was palatial; now it's average. My condo is bigger than my parent's entire home. On average, families have not become larger, but homes have. Why is that?





It also sounds like you think "simple" = "bad." I don't. As someone who has donated more "stuff" to the Society for St. Vincent de Paul over the last year than I care to mention, "simple" gives me more time to spend with family and friends and focusing on things I enjoy rather than vacuuming a large house (or spending time trying to find a good housekeeper), dusting knicknacks, worrying about someone stealing "my stuff," or keeping up with the proverbial Joneses.
 
<p>Agree with you there.</p>

<p>We just downgraded from 3,600 to 2,700 and still have way more room than we really need.</p>

<p>I can't stand clutter, so it was a great opportunity to reign-in my husband and have a more manageable existence.</p>
 
<p>We always call those closets under the stairs "Harry Potter rooms" and you have to say Harry Potter the way Snape says it. I want a room that my children do not know exists so they cannot find me. For too much clutter we need a junk room, which is just an extra room to put all the junk you will never use or look at again. </p>
 
<p>So we all accept that we can do with less space.</p>

<p>Now that I know I sound obtuse - I'm all-in!</p>

<p>I am still confused about how that is necessarily a solution.</p>

<p>When we speak of rental income valuation, we speak of price to rent per sq. ft., so we are already comparing apples-to-apples .v. cost-to-build per sq. ft.</p>

<p>In fact, we all know that small homes don't offer the economy of scale than large ones do.</p>

<p>Is the answer in valuing land much, much less?</p>

<p> </p>
 
<p>One other question:</p>

<p>I live not far from The District at Tustin Legacy.</p>

<p>It seems that many (if not all) of the tenants in there are corporate-owned entities.</p>

<p>This is the same as at most TIC projects throughout Irvine - and probably throughout Orange County generally, if not nationally.</p>

<p>I can't help but ask myself: how are we to raise our income levels, when so many types of businesses that locals could own are owned by large corporations?</p>

<p>So the employment remains, but not the profit.</p>

<p>I appreciate Costo as much as the next person, but it just seems dangerous (the trend, not Costco, unless something falls on you)!</p>
 
"It seems that many (if not all) of the tenants in there are corporate-owned entities.

<p>This is the same as at most TIC projects throughout Irvine - and probably throughout Orange County generally, if not nationally."</p>

<p>I don't recall who around here said it, but it was pointed out that TIC likes the chains because they are more predictably successful than start-ups, i.e., it's not fun to chase after unpaid rent and broken lease damages from a business that is BK.</p>
 
<p>Ah yes, The Almightly Irvine Company!</p>

<p>Be afraid, be very afraid.</p>
 
The bungalows built in early 20th century were 600-800 sq ft. By 1950s they were 900 sq ft-ish, and by 1970s the average new SFR was 1500-1700 sq ft. By 2000's, it had grown to 2000-2400 sq ft. Some cities are now considering laws to restrict McMansions::


http://www.guardian.co.uk/international/story/0,,2138023,00.html





And to make RE more affordable, cities like LA is considering studio apartments as small as 250 sq ft:


http://www.latimes.com/news/local/la-me-small24jul24,0,6182231.story?coll=la-home-center





250 sq ft is probably pushing it, but something like a 450-500 sq ft studio would be great for a young working professional or new couple just starting out. It's big enough for "Ikea Living". If and when we build a decent light rail mass transit network, we may see more mid rise apartment buildings near rail stations that provide such affordable housing.





In the mean time, we can still buy smaller, more affordable homes and adopt a more minimalist style of living. Save $, have less crap in storage, pay off the house sooner, and be able to retire early.





But that doesn't quite serve our... materialistic consumerism society. Plus I think Uncle Sam would prefer if you'd buy a big house and be stuck working until you drop to pay income tax... oops I mean your mortgage.
 
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