The Expert Podcast

The real estate industry is begging contractors to build more properties. Here's an article with a quote saying that the U.S. real estate market needs more housing. Great, okay, we know that. This real estate expert says America needs more housing, making a note to developers to get out there and build us more housing, right? Telling builders, "Come on, man, get out there!" Like motivation to build more houses.

Well, news flash for the real estate industry—no need to be a wise guy—but developers, builders, and contractors, they want to build. That's what we do for a living. If you're a contractor and you're not building, you're not making any money. If you're just sitting around twiddling your thumbs, you have no money coming in, and a lot of money is going out. You have overhead on your equipment, materials, bond, insurance, so you have to be building. We want to build houses.

The problem is the combination of the economy and costs are not making it really conducive to building new single-family homes. A lot of it has less to do with the cost of materials and more with things like permitting and approvals. In many parts of the country, you start a permit process today, and it could take eight or nine months—sometimes more than a year—to get the permitting done. The way the market is right now, if you have to sit on that property and have carrying costs and unknown future lumber costs, it doesn't make sense to build that house.

The other thing is, with interest rates as high as they are, an average house that you'd build—even a low-end house—by the time you buy the land and you have the permits and fees, you might have a hundred thousand dollars into site costs, improvements, utilities, and permits. And that's just before you even scratch the ground with a digger—100 grand.

Now, you are going to build, let's say, even a modest 1,000-square-foot house. Even if somehow you could build that house for $200 a square foot—which may not be the easiest thing to do with material costs and everything else—but if somehow you could be very efficient and build that house for $200 a square foot, now you have 300 grand into that 1,000-square-foot house. What are you going to sell that house for? The average cost for a home right now is $400,000. Is that house going to sell for more than $400,000? Even if you sell it for $400,000, well, you're going to have carrying costs on that property for one year. You're going to have real estate commissions and closing costs. Add all that up, and that could be $50,000. Right, so now your cost of sale and the cost of the transaction is $350,000.

If you ask $399,000, yeah, you made $50,000, but here's the thing: how many of those can you build in a year, and how much does it cost for you to run a business? Even if you build four of those a year and somehow make $200,000 as a builder, you're putting your money at risk. You're almost better off going to take a job at a construction company and making a salary of $100,000 to $150,000 rather than putting your livelihood at risk.

And that's a lot of big assumptions. That's the assumption that you can build a house for $200 a square foot, which is a big if. That's also the assumption that you're going to sell that house in a year for $400,000. It's also a big assumption that the interest rates aren't going to go up even more, or that lumber costs aren't going to go up even more.

So we want to build houses, but there are a lot of pressures against developers and contractors building single-family homes. Remodels, additions, upgrades—even commercial tenant improvements—are something that's a little more sure because you don't have to go through as much speculation. Those things are commissioned in advance by the client.

Let us know what you think in the comments about the state of affairs for building new single-family homes in the United States.