The Expert Podcast

Here's something we've talked about before on this channel. When it comes to home construction, one of the things that people talk about with the housing market is just building a bunch more houses—that'll solve the housing shortage, reduce rents, and lower the prices of houses you could buy.

Well, in theory, that sounds great. But in reality, the houses are not being built fast enough. Here's an article from Housing Wire about why we won't build millions of new homes. And as a licensed general contractor, we know why—because the permit process, the approval process, is still very, very difficult, and there's still some uncertainty in the market.

You might say, "Well, gee, the prices are high on housing. You should be able to build a house and make a profit." That's assuming you can sell it. If the housing market has high prices but not a lot of people are buying, you could build all the houses you want, but if no one's going to buy them at that high price, you could be stuck. People are still hesitating on buying houses.

Interest rates are still stubbornly high. They have come down a little bit from their highest levels, but they're still up there. At the same time, builders are stuck with higher construction costs. Materials prices went up with inflation and didn't really go back down. Labor costs are much higher, and finding quality subcontractors, tradespeople, and workers is still very difficult.

Even if you want to build a home, you have to find enough tradespeople. The quality might not be as good as you normally would expect, which means you have to go back in after the fact and fix things, which costs more money. That also doesn’t take into account the fact that if the approvals and the permits take a long time to get from your government planning board, you're going to be sitting on the carrying costs of that property for a long time. And then, you have to count on the fact that the house is getting sold.

We looked at some closing statements for some recent transactions that a builder had done. They built a house—a new home, reasonably priced. This was in an area of the southeast. They sold the house for about $460,000. We looked at the settlement statement, and after they paid all their subcontractors, their building loan payback, and the land block, they walked away with net proceeds of about $30,000—so a little bit less than 10%.

Now, the builder may have made more money. They may have taken out some money during the construction process. But in reality, that’s probably about right. If you build a new home, you may do a net profit of about $30,000 on a $460,000 house. You might say, "That's good, you made $30,000." But think about it—the process of constructing that home probably took about a year.

By the time you subdivided the land, got the permits, did the site work, did the grading, poured the foundation, framed, roofed, installed mechanicals, and completed all the other steps, you have your sales commission to account for. The sales commission on a $460,000 house is going to be about $25,000. You pay the real estate agents. So, at the end of the day, you made $30,000 running that project for a year.

Now, they probably built two or three houses in a year, but if you're a builder and you want to make $200,000 to $300,000 a year, you have to construct, complete, and sell eight to ten houses a year. That's almost one a month.

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You also have to make sure you're not going to get stuck with a house that's tough to sell. Maybe the floor plan you picked out isn’t good, or maybe the lot isn’t as desirable. You could get stuck with it. The market is kind of stuck.

So, what are people doing about this? Well, some homeowners are deciding not to buy a new house because it's tough to find. Instead, they’re renovating. They don’t want to risk the frozen housing market. If they like their area but just need a better home, they’re choosing to renovate instead of moving.

If they sold their house, they’d have to pay a 5-6% commission. On a $500,000 house, that's $30,000. Moving might cost $5,000. New window treatments, landscaping, and other expenses could add up to another $5,000. They might need to buy new appliances. By the time they're done, they could have $50,000 in relocation costs.

So instead, why not spend $100,000 and redo the house they’re in? Maybe add square footage or renovate a part of it. That’s what more and more people are doing. Builders like it because it’s an easier project, and they can still make a $20,000 to $30,000 profit without having to come out of pocket for land, commissions, and other costs.

Renovation projects require fewer permits. You’re not adding new capacity to the town’s infrastructure—no new sewer, water, or electrical. It’s already there, making approvals much easier. It also doesn’t change property taxes as drastically as buying a new home. Sure, when you renovate, your home value goes up and taxes may be reassessed. But when you buy a new house, you jump to a new tax bracket entirely.

The only downside? Renovating doesn’t add new housing stock. The housing market still doesn’t have enough homes for sale. There aren’t enough move-up houses for first-time buyers or families looking to upgrade. That means the housing market isn't adding new units fast enough to keep up with demand.

Many estimates say there are about five million houses too few for the current market need. That means a lot of people are doubling up as roommates or living in long-term hotels and motels. That’s not good. More single-family homes need to free up so that renters can move into them. That way, apartments open up, and people stuck in motels or on the street have affordable rental options.

This is what’s going on in the housing market. If you have comments, let us know below. If you want to speak with a licensed general contractor about any questions, click the link and schedule a consultation.

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