Yesterday, I shared my thoughts on how the current appraisal guidelines will likely slow the price recovery of the Phoenix housing market. Today I wanted to dive into that price discussion a little bit further. Right now, many homes are selling at prices that are substantially lower than a fair and balanced market should ever allow. The majority of what is selling today is selling far below the value of the property, if you consider the cost approach to valuation (what would it cost to build the structure from scratch today). With labor and material costs at current pricing, it would be impossible to build any of these homes, for example, for the price they recently sold at:
Sold: 7/13/2006 Price: $171,294
Sold: 2/27/2009 Price: $35,000
Size: 1320 sq ft 3 bedroom/2 bath
Sold: 5/1/2006 Price: 180,647
Sold: 5/8/2009 Price: $52,000
Size: 2012 sq ft 4 bedroom/2.5 bath
Sold: 11/4/04 Price: $168,815
Sold: 3/4/2009 Price: 57,000
Size: 1839 sq ft 4 bedroom/3 bath
All of these homes have stucco exteriors, tile roofs, and slab concrete foundations. They all have concrete driveways. Sure, they all needed work to bring them into livable condition, but they all had partially functioning bathrooms, kitchens, and cabinets. They all have landscaping, with automatic drip systems, and back yard areas for kids to play in or adults to relax. In short, while they weren’t perfect homes, there was a lot of house to be had, for not much money.
Adding up the features of the homes, and what it would cost to build a home of similar condition, the prices paid were ridiculously low. If you figure a home builder has roughly a 25% profit margin (used to pay warranty coverage, and eventually what is left over becomes true profit), the hard cost to build these homes was $126,611 – $135,485, during the 2004-2006 time period. Labor and material costs have fallen slightly, due to excess supply, but there is no way that homes of this sort, sold for well under 50% of their construction costs from just a few years ago, could possibly be built again today at those prices, even if a builder were willing to work for free, which isn’t a very successful business model.
These are extreme examples, of course, used to help drive the point home better. But there are hundreds of homes selling for under $100k today that cannot be built for that price. This is just one indicator to me that while prices are low today, they cannot stay this low for long. The foreclosure inventory that is fueling the market today will end. It isn’t limitless supply, because unlike new construction, it cannot make more supply. When the supply runs dry, and new housing units are needed, those new housing units will be forced to price themselves well above recent comparable homes. The pricing pendulum has swung too far, too low, too fast.
Going back to the conservative appraisal environment we have today, I’m forced to wonder how this impasse between prices will resolve itself. In a market without pricing controls, price could resolve itself quickly on the upside, just as it has done on the down side. But will that be the case now? I have doubts.
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