|Home Prices (retail) versus Actual Cost to Build the Home last 100 Years|
From the web site http://doctorhousingbubble.com comes this graph tracking the following items for the last 100 years:
- Home Sale Prices: what people paid for their house (i.e. the retail price).
- Building Prices: cost of materials and labor to build a home or structure
- Population Growth in the USA (supply vs demand not always the factor you think it is)
- Interest Rates for home Mortgages
For me, this data is very telling. I have been preaching for the last 15 years that U.S. housing prices are over valued. (See my earlier post on why I KNOW home prices are over often valued. http://shantyworld.blogspot.com/2008_05_01_archive.html )
Let's look at few key data points this graph tells us about the last 100 years of housing costs:
1. Housing prices, more or less, had some correlation to building costs until about 1943-ish. After the Great Depression and after the War, the US economy stabilizes, employment & the population increases, there's a minor spike in housing prices. Notice, however, there is no proportional correlation between building costs and actual home sale prices from 1945ish through 1980. With the exception of a few short-term blips, Housing Prices are somewhat flat between 1943 until 1977 (as a function of building costs) AND increasing population (i.e. demand). Starting in 1982, Building Costs appear to actually trend DOWN until 2002, yet the selling price of Homes rises dramatically through 2008. There is an irrational spike up in prices in 1998, while the cost of Building remains flat. (So granite counters and stainless steel appliances et al, are NOT justification for an additional 25-50% in price.)
2. Dropping Interest rates seem to serve as a catalyst for justifying housing price hikes. Perhaps, this controlled "supply vs demand" is working to almost fix prices to favor the seller (and all who benefit from housing sales) -- and not the buyer. Interest rate fluctuations mostly seem to affect the cost of building materials (probably to suppliers) -- but seems to have a deleterious affect on the sales price. One can not even argue that demand increased as population increased because for most of the last 100 years, and until about 1955, prices remain proportional to population growth as a function of demand. Between 1958 and 1978 prices remain flat, even while the population (and arguably demand) increases and interest rates rise (for the same period.) But again, even increases in Buildings Costs have no proportional correlation to Housing sales prices (after 1945.). In fact, starting about 1979-80, Building costs start to trend down, while the cost to buy a house spikes up dramatically until the 2008 financial meltdown. Interest rates are at their highest levels between 1980 - 1990, while Building Costs are dropping, and the selling price of a house is rising (over the same period.)
The Housing purchase price doubles between 1982 & 2008, while the cost to build has steadily trended down for most of the same period.
What's missing from this chart is real wage earning power for the middle class. We know that during the last 30 years, wealth for the top 2% of Americans grew at astonishing rates, while real net worth and income for the middle class actually dropped. (See Document:
From The New Economist, "..the richest 1% hold one third of the total wealth in the economy.. Inequity rose sharply after 1979." [end of quote] (i.e. the Reagan / GOP wealth transfer era.)
Again, ShantyWorld.com covers some of these topics in earlier posts, but I'll repeat a few key points because too few seem to grasp the inherent conflict of interest driving this false valuation of housing over the last 30 years:
a. Developers, Contractors/Builders have a built-in incentive to sell housing (or any construction) for more than it is worth. When property owners (buyers) don't have impartial 3rd party advocates (i.e. an architect, lawyer, engineers) working for them, they are more likely to over pay, and get inferior systems, inferior buildings. How do you know that the Builder you hired is installing X, Y, Z properly? Clearly the chart shows buildings costs have little correlation to the actual selling price after 1978. Building costs actually went down after 1978, yet the sales price for homes climbed dramatically. Also note, the 1980s Reagan era also ushered in the modern era of de-regulation and the dilution of consumer protection against predatory financial products. Business should earn a profit for good work. But when does that profit become excessive? at 25% over costs? 50%, 100%, 200%? 300%? as we've seen the last 15 years?
b. Realtors are generally paid as a percentage of the final sale price for a property. There is a built-in incentive for Realtors to want the price for any property to go higher, as their profit/earnings is tied directly to the sale price. The Realtors' goal is to CLOSE at the highest possible price. So, why would Realtors want to see housing prices and appraisals drop in 2009 (as compared to prices 3-5 years ago?)
c. Banks & Mortgage companies have a built-in incentive to see higher housing prices. The larger the loan amount, the more Banks can make (as long as the borrower is deemed not to be a high risk. The ability of home owners to pay more didn't really increase over the last 50 years (because real wages for the middle class have been flat), Banks just decided to take more risks. See comments (below) regarding Economist Hyman Minsky's foretelling of how risk-taking would result in a collapsed economy.
d. Cities / Municipalities and Politicians have an incentive to see property valuations increase. After all, property tax revenue is a function of retail housing prices. Increases in property values is a false measurement through which politicians measure their own effectiveness at governing and public policy. Politicians, developers and contractors exploited the American sickness of trying to keep up with the Joneses and conspicuous consumption. (Appraisals are a function of so-called "comparable" sales prices.) The industries & sectors complaining about the current appraisal levels are contractors, developers and those who overpaid for their house (and the banks who pushed these phony inflated valuations on people unable to assume high debt risk levels.)
It is my opinion that the cost to build a new house is (roughly) represented by 35-40% spent on Materials (& systems), versus 65-60% spent on labor. It is about the same (labor) cost (as averaged over the entire development costs) to install an energy efficient window versus an inefficient or lesser efficient window. It's generally NOT 20%, 30% or 40% more to use a better system. So using a better product generally doesn't add 30-100% to the budget over the cost of the entire project. Over time, the decision to use quality systems (not high-end systems) generally adds value and often pays for itself versus opting for the lower quality.
e. "Location, Location, Location" is a social [salesman rhetoric] construct: 30% truth, 70% faux social meme (used to create wealth via societal & cultural bias.) "Location" is a wealth apportioning method used and exploited by Developers, Realtors (salesmen), corporate banking, politicians, the affluent etc., to justify artificial valuation for the purpose of private profiteering at the expense of others. The 'location' topic is too expansive to cover in this post but deserves a mention.
SO, IT IS NO SURPRISE THAT THE COST OF BUILDING many U.S. HOMES HAD LITTLE TO DO WITH THE RETAIL SELLING PRICE -- at least over the last 60 years. (See DrHousingBubble chart.) The people who can least afford to lose money on a construction project (or buying a home, property) are the ones who are likely to benefit the MOST by hiring a team of advocates (i.e. architect, engineers, attorney, accountant etc.) to help them through the project process.
According to Bryan Bell, only about 2% of new home buyers work with an architect.
Yet, we know that houses designed by architects, are more likely to increase in value (over more sustained periods), cost less to operate, be more attractive, even cost less to build (for the same products & systems), are less likely to rapidly decrease in value, and will be more comfortable than homes purchased from a developer or home builder-led properties.
Many would now agree the greed of corporate banking and the major players (above) driving retail property pricing and financing largely created a structural weakness that led to the 2008 financial collapse. Of course, individual property owners have a role in the global financial collapse too: borrowing more than they can afford; running up high debt-to-savings ratios; leveraging too many of their assets; spending (borrowing) for the purpose of appearing more affluent (to others) than they actually were, etc. Perhaps the most grievous act of all: those who remained quiet (in the public & private sectors) as this house of cards was built around all of us. Many people did see the 2008 economic collapse coming -- not just economists and bankers.
No society can tolerate irrational double-digit price % increases (over a short period) in housing, health care, food, water, and other BASIC HUMAN NEEDS, out-pacing real earnings for average workers, and think said price increases are sustainable over time (where the profits go primarily to a small minority.)
Again, the people who can LEAST afford to waste money building, renovating a home (or any structure, space) are the ones who would BENEFIT THE MOST by hiring a team of advocates (i.e. architect, engineers, attorney, accountant etc.) to help them through the process.
For more Information & Analysis on these topics, please also see:
- How to Triple the Cost of Building a House - http://shantyworld.blogspot.com/2009/09/how-to-triple-cost-of-building-house.html
- Housing Valuation is Largely a Scam (at the retail level) - http://shantyworld.blogspot.com/2008_05_01_archive.html
- Construction Nightmares: More common than you think. http://shantyworld.blogspot.com/2008_02_01_archive.html
- More info on Economist Hyman Minsky - http://en.wikipedia.org/wiki/Hyman_Minsky and
New Yorker article: http://www.newyorker.com/talk/comment/2008/02/04/080204taco_talk_cassidy and Boston Globe:
Graph via http://doctorhousingbubble.com
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