The Expert Podcast

Sentiment in the home building industry is at all-time lows. Builders are very skeptical and really scared to build any kind of spec homes or even get involved with constructing new homes for clients. What's the reason? They say we're in a housing recession, and certainly, the volume of home purchases is plummeting. Not as many houses are being purchased, although prices are still holding about where they have been. There may be a little softness in some areas, while others have seen prices rise over the last three to four months. However, the volume is undeniably down.

It’s important to note that a lot of this housing recession is psychological. As a builder, this might actually be the best time to build a house. If nobody else is building, you could be the contrarian. You don’t need to go out and build 10 spec homes, but consider the advantages: lumber prices are down, labor is a bit more available, and there’s not as much competition for building new homes. What remains is the demand—there are still four to five million unfulfilled homebuyers out there. These are people who tried to buy a house in the last 24 months but couldn’t because of bidding wars or lack of inventory.

Yes, there’s more inventory now, but some of it consists of homes that are not very appealing—what they call "left-handed" options. If you build a new house, you’re working with a clean slate. Everything is brand new, and by using efficient construction methods, you can avoid overbuilding. You don’t want to build a $900,000 or $800,000 house. Depending on the fees and land costs in your area, you could aim to build something for $340,000, $350,000, or maybe $400,000 and sell it at the current median price of $430,000 to $440,000. You’d make a little profit while still offering a new house at median money.

If you don’t have any other work lined up, this could be an opportunity. Look, if you’ve got remodels and additions to focus on, then forget about it. But if you’re a builder and can construct a house that you know you can sell for mid-to-low $400,000s, you’re not likely to get hurt on that project. Even if the recession persists and the volume doesn’t return to levels from two or three years ago, there are still people who need to buy a house. A brand-new, well-constructed home offered at or around the median home price is likely to find a buyer, and you can make a modest profit.

This may not seem critical right now, as there’s still a backlog of work. For example, we talked to a roofing subcontractor two days ago who has a 12- to 14-month backlog. If you booked them today, they might be able to start by the end of 2023 or early 2024. That’s great for now, but at some point, this backlog will start to erode.

If you own property or can secure a property on option, now might be the time to act. Start working on permits—they don’t cost much, just a few grand. Begin some design work or site preparations. You don’t need to go all-in immediately by digging septic systems or pouring concrete, but you can start getting the lot ready. That way, when an opportunity arises in early or mid-2023, you’re ahead of the game and not six months behind on permits and approvals.

Although it might seem counterintuitive, this could be a great time to build medium-priced houses. You’re not going to build below-market houses because labor and materials are still too costly. However, you could construct something in the $400,000 to $500,000 range, depending on permit fees and development costs in your area. By working on it in between other jobs, you can keep your equipment busy and your capital improvements amortized.