The real estate blog.

You’ve probably seen the news this week about builder confidence reaching a 23 year low and housing starts and completions going down across most of the nation. Even Utah is not immune to this building downturn.

Yesterday’s Tribune reports -

The news just keeps getting worse for home builders along the Wasatch Front, where demand for new homes in September plummeted to the lowest level since 1990.

Builders took out permits for the construction of 485 homes locally last month, down from 1,191 in September 2006, according to Construction Monitor, which tracks building activity throughout the West. The last time residential building activity along the Wasatch Front was this low was 17 years ago, when builders pulled 396 permits for new housing units.

/>I’m not writing this to deny building has gone down, I’m simply trying to explain what’s going on. The Tribune misspoke when it wrote demand for new homes is the lowest since 1990 simply because permits were at that level. There are other factors at play besides demand that are causing these permit numbers to go down.

While perceived demand is one aspect of it, a big factor coming into play now is the availability of land that is economically viable to develop and build on. Consider the Wasatch Front and the amount of building that has been going on in the last decade. The I-15 corridor is almost completely built up from Brigham City to Santa Quin with houses and commercial construction. Where in Salt Lake City is affordable, well located developable land? There isn’t a lot of it and that’s reflected in these numbers.

I saw a comment at another blog the other day reflecting a similar observation. The author wrote -

Read an article about the new housing coming in lower than expected. My question is this. Why is the number of new housing so important? So people aren’t building new homes. They can still purchase existing homes, etc. Aren’t we eventually going to run out of space to build new housing anyhow. Granted, I know purchases are down as well, but isn’t the number of purchase loans more important than people building new homes?

New home construction doesn’t necessarily mean expansion and growth. In my particular area I wouldn’t want to build in the space that’s currently unoccupied. There’s no room for expansion and new communities as there really isn’t any desire to get further out from everything.

The second factor driving these lower starts is cost. The building boom was good for a while, but everybody along the trough wants to get paid. Labor costs have gone up. Materials costs have gone up. Government fees for permits and plans have gone up. Of course, the shortage of land has driven costs up as well. Diana Olick wrote the other day that reigniting demand for new homes isn’t as simple as lowering prices any more.

Ok, I ask, so why don’t the big builders bring the prices down? His answer: they can’t, not with the houses they built and Americans demanded in the past five years. “We probably need, from a new builder’s perspective, a whole different type of construction going forward to make it affordable,” says Puryear.

He’s talking about a different prototype house. “I think what the world doesn’t understand here is that we have had substantial inflation in the cost of materials that are used to build: concrete, steel, petroleum-based products, copper, pvc pipe,” Puryear continues. Why? China, India, etc: “We’re out buying concrete on the world market with our devalued dollar against the bid coming from other countries in the world that are absorbing all the commodities currently, and we’re in a very unfavorable position if you’re a home builder,” says Puryear.

Despite what some bubble bloggers are writing about house prices having to drop 50% before they become worth buying, we may actually see demand decrease, while prices don’t drop much if any at all. The only sellers being able to lower prices will be those with sizable equity and that is for existing construction.

Two scenarios for future growth seem evident to me. If buyers want new homes in Utah, they must move to the periphery for it to be affordable or they accept less house and yard for the same amount of money.

A few months ago I went to Santa Quin to look at some property. The last time I had been down that way, there wasn’t much development past Spanish Fork. This time, the homes and buildings stretched almost all the way to my destination. While the land being offered didn’t make sense at that time, I thought eventually it would. To build a similar home there versus Lehi, the difference was $150k less, mostly tied to the cost of land.

The other trend we’re seeing in town is redevelopment of older areas. Areas like South Salt Lake and the fringe area of downtown from 700 to 900 South between State and 400 East are prime areas for tear down of old homes and replacement with new. The challenge is housing density. One can’t replace one old house that cost $25,000 originally with one new house that feasibly can’t sell for more than $250k now. The solution is higher density construction of condos and townhomes. Essentially, consumers will be getting less for more if they care about location and price.

It’s a difficult situation, but population growth demands sacrifices.

I hope this helps make sense of the housing start numbers. Those numbers reflect much more than current demand.