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The reason new construction prices have not come down.

By
Real Estate Agent with Compass

This is a buyers market! Prices have not been this low in years, mortgage rates are at a 20 year low and the choices are many with inventory high.  So why is the cost of New Construction still so high? 

I get asked this question on a daily basis.  There are many factors that go into the price of a new home.  The first and most important factor is the land cost.  Builders and developers have purchased the land in many cases more than 1 year ago, but most likely 2-3 years before a project has been approved.  This cost is fixed as the builders bought land when prices were still high. 

Material costs have also skyrocketed.  The cost of shipping had increased when the gas costs were so high....but now that the cost of gas has come down, the shipping fees have not!  The materials costs have come down recently, but this has no impact on a home that has already been built.  Subcontractor's are more available today, however quality sub-contractors can not afford to cut their labor cost.  Keep in mind that overhead such as health insurance, worker comp, liability, etc ave increased so if these contractors want to stay in business they need to get paid a fair rate. 

In order for the cost of new construction to come down, we need to see land cost come down.  If a builder is paying $250,000 for an approved building lot in Glastonbury, CT then they can not put a 2200 sq ft home on the land.  It will never appraise at a price high enough for a builder to profit.  This is the reason why we have seen such big homes built with high price tags! 

Hopefully we will see the land cost come down, smaller homes being built that are more affordable in this ever changing real estate market.

 

Comments (8)

Anna Ryan
Keller Williams Realty - Simpsonville, SC

very informative, Thanks.

Feb 04, 2009 11:22 AM
Anthony Stokes-Pereira
Better Homes and Gardens Rand Realty - Nanuet, NY
Realtor

Hi Susan;

Great post and super information. I thank you!

Feb 04, 2009 11:31 AM
Dan and Amy Schuman
Howard Hanna Real Estate Services - Solon, OH
Luxury Home Specialists

That was a very interesting post. I didn't really think about land acquisition costs and most consumers probably don't either. Thank you for sharing this bit of information.

Feb 04, 2009 11:42 AM
Ellie McIntire
Ellicott City Clarksville Howard County Maryland Real Estate - Ellicott City, MD
Luxury service in Central Maryland

It's a tough economy for builders, that is for sure. In Florida they are just walking away from their projects.

Feb 04, 2009 12:02 PM
Lou Ludwig
Ludwig & Associates - Boca Raton, FL
Designations Earned CRB, CRS, CIPS, GRI, SRES, TRC

Hi Susan

I enjoyed your post, it was right on target and very informative.

Good luck and success

Lou Ludwig

Feb 04, 2009 12:33 PM
Paul F. Stillwaggon Warren NJ
Weichert Realtors - Warren, NJ
NJ Estates Real Estate Group, Weichert Realtors

Very knowledgeable post, land is going to take a long time before it comes down for many of the same reasons. (1) developers paid a lot for the land, (2) the towns milked the developers for very penny they could get out of them to get their approvals. (3) Then forced them to pay heavy fees to connect to the sewers they put in (4) Then taxed each lot at the top rate even when the builder could not build on them. (5) I represent a developer that is paying a town $6,000 a lot for taxes for  20 lots for over 18 months and he could only get 1 building permit from the town.

Feb 04, 2009 12:40 PM
real estate real estate
Providence, RI

It makes lots of sense but it is bad idea that investors still count past cost. Past cost are long past and they should focus on current market price vs potential loss. They should hire a real economist to guide them on how to price according to CURRENT market condition.

Feb 04, 2009 01:24 PM
Sasha Miletic - Windsor Real Estate
RE/MAX Preferred Realty Ltd. - Windsor, ON

Hi Susan, Good post.. Thanks for sharing. Keep posting best.

Best - Sash

Feb 04, 2009 08:48 PM