Effect of High Costs on Real Estate

The Effect of High Costs on Real Estate Prices

Cost versus Selling Price

Is the high cost of land and materials affecting the price we have to pay for new construction? Of course. Does the “market” care what the original cost of something is when the market price is settled? No. Supply and demand set market price, not the cost of goods. This is a simplification, but I would like to talk about the rising cost of raw materials and land and its effect on the real estate market today.

The continuing increases in land, labor, and raw material costs will provide support for the prices of existing properties, simply because the comparables in the market place will remain high. If a new condo or home will cost thirty percent more to build, then the existing inventory will have price support in the market place.

The Southwest Florida real estate market is unique (from the rest of the country) because demand from baby boomers will continue to provide absorption. There will be a 12 to 18 month absorption lag, but I do not believe there will be substantial deflation in home prices. There are pockets of “bargains” but these bargains are relative to current prices not to historical ones.

Does it really matter what the cost of something is when we make an offer? Perhaps. As buyers of Real Estate, we always want to know what someone paid for the property we are trying to buy from them. For example, say you are looking at a five year old home. The ask price is $500,000. You learn from county records that the seller paid $250,000 five years ago. You also learn that a very similar house sold for $600,000 two weeks ago. I imagine you would ignore what the seller paid for his home. It looks like a very good deal based on the market price. What he paid is immaterial.
But let’s say that instead of seeing a similar house that sold for $600,000 two weeks ago, you see one that sold for $400,000 two weeks ago. Again, you are more concerned with market forces than what he paid for it, but with the knowledge of the sellers cost you can be confident at least that his equity is large and a lower offer may be palatable to him.

The cost factor provides more of a yes/no; go/no go decision than an aid in establishing price.

For a developer or builder, if the cost to build a new mid-rise on the river is $500,000 per condo and the market is telling him that he can only sell them for a small margin above this price, he will decide not to proceed with the project. The same thing applies to single family homes. If a builder has to pay $80,000 for a lot and it will cost him $200,000 to build the home that he can only sell for $300,000, you can be assured that he will not proceed. On the other hand, if the builder had the lots in inventory and only paid $5000 per lot, would he pass the savings on to his buyer, or would he market the home at the comparable going price? He would market at the comparable selling price, for sure. BUT….this builder, by the way, has a great deal more flexibility in a down market. It is with these builders today that there are some opportunities.

What should we as buyers do? My position is that prices will not decrease, at least not in general and not long term. I suggest you take advantage of projects that have the flexibility of the builder that paid only $5000 for the lot, or the developer that locked in his raw material prices long ago. Existing homes will be bargains, existing condo projects like Paramount, Grande Isle, or some of the properties featured on our website are worth looking in to.

New projects that compete with these projects have costs that are in some cases TWICE what it cost to build these. This means that these existing projects, once absorbed – and it could take up to 18 months – will equalize in price. They are a very good value today. (Check out Citadel)

I had a good response from those of you that are interested in finding out more about syndicates that we may put together. I am not looking for investors at this point but would like to start building a data base of qualified investors that may want in the future to join forces with us in some major acquisitions. We have not sent questionnaires out but will do so soon, so be patient. I would like to talk to those interested personally and get to know you. If you are interested, email me at Gregg@ma-realty.com and I will contact you soon.

Cyperlin Center construction docs are now in the hands of the subs. BBL will be building this project and hopes to break ground in September. I still have two ¼ floors available.

­­­­­­­­­­­­­­­­­­­­­­­­­­ Thanks for your emails and comments. As always, I can be reached at Gregg@ma-realty.com
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