Since the Big Shitpile appeared, almost a year ago now (real estate markets move slowly) we’ve seen the damage move from mortgage lenders to home builders to banks, to Wall Street.
The next shoe to drop is going to be the construction industry.
This becomes clear in reading the whining of Michael Hill, CEO of "luxury homebuilder" Emerge Homes, which was printed in my daily fishwrap today but apparently originated at The Washington Post. Please, get out the violins and hankies:
There may never be enough capacity to absorb all of these homes and
other existing homes using 30-year mortgages, because there simply
aren’t enough people with the incomes to meet the requirements. Prices
could not roll back far enough without damaging the economy irreparably.
Irreparably means beyond repair. It means a problem lies beyond any solution, ever. Kind of like the problems of the dinosaurs are irreparable, or those of the British Empire.
He’s right in this respect. It’s very likely that Michael Hill, and many people like him, will be unable to survive the adjusting of home prices to market, the 50% haircut of a balloon market. Somehow the dot-coms survived it and the biotechs survived it and even the Japanese survived, it, but such a haircut would do "irreparable" damage to the U.S. economy.
Hill’s suggestion? Create new kinds of financial instruments, like, say, 50-year mortgages, so that home prices can stay where they are, with maybe a tiny little adjustment.
Three words for Mr. Michael Hill. Suck on it.
Hill is not the only fool living in Cloud CuckooLand.
The last few weeks my wife and I have been pricing a home addition. We have a very nice, 88 year old home, but it’s got just one bathroom. We want to add to the back, put in that bathroom, and some bedroom space besides. We are just finishing paying off our mortgage (finally) of $50,000, and an addition like that would guarantee a happy retirement, in place.
We’ve called three companies. The lowest bid we’ve gotten is $170,000.
One said they were incredibly busy but would make an offer. A second quoted the $170,000 figure, sight unseen. The third said "whatever your budget, tell me what you can spend," a great way to get you on the hook so they can reel you in later.
I’ve seen these guys in action. We’ve been walking through the neighborhood, watching construction crews for the last year, in anticipation of this. Every time we approach people look at us suspiciously — we might be federales. We’re not talking about American jobs being at risk here.
Yet none of these folks think they can put in 450 square feet for less than $400 sq/ft? Really?
The rule of thumb in real estate has generally been that you price the house at twice your costs. Much of our home price inflation has been driven by rising land prices, but not all of it. I know lumber is up, nails are up, fixtures are up, and the costs of providing these goods is continuing to rise as well.
But I’m thinking renovators are really just building their "standard" 100% profit margin into these bids. I may be wrong, but I think if they were less busy they would suddenly find they could do a great job for a lot less.
They’re going to have to, because I’m in no mood to tote a $150,000 bathroom mortgage around into my old age. Not right now. I’ll wait until the prices come down a bit.
I suspect a lot of people feel that way. And I suspect the builders and construction trades are going to start feeling the pain real soon now.
