 Market Report: August 2006
Dear Friends:
This is the second part of a series on affordable housing and this month I will look at the supply side. This is important as the price of new product acts as a buffer against price compression. I recently interviewed an experienced local architect, builder and development consultant about this subject. He requested anonymity.
--Jim
The Supply Side
Q: Is there a way to provide governmental incentives so that our nurses and teachers will not have to spend two hours a day commuting to their jobs?
A: That is a tough nut and there is no easy answer. Even though a portion of each housing project must be sold at under-market prices, developers opt to pay a fee and sell the homes at market; they make more money that way.
Q: So the system in place to provide some affordable housing does not work. That fits in with my view that builders only want to produce safe projects; building that $750,000, 3,000 square foot suburban house rather take on an inner city project with more risks.
A: That may be true, but then you would need to change people’s expectations. They would have to forgo the white picket fence and back yard. We need to think like people in Manhattan or other urban areas and change out expectations as to what constitutes a home.
Q: By staying with the free market model there seems little hope. If you were Housing Czar how would you solve the problem?
A: There is no answer. Just look at building and labor costs……
Q: OK, then how do you see building and labor costs going out three years.
A: Since steel started going up in ’04 and then copper and concrete; I mean in the last six months, construction costs have gone up 4.6%, that is an annual rate of 9%. So where it is going? This is will the toughest year but then labor will start going up again---so I see 6% a year over the next year and then 5% for the next two. Maybe it is the China factor plus natural disasters but it reflects a push for all commodity products.
Q: What about labor expense and where do you see that going for the next three years?
A: The labor cost increase on our side is approaching 5 to 10 percent per year. Of course the other problem is availability of skilled labor, which is low because everyone in Southern California is competing for the same limited labor pool. Labor is up 7% in Las Vegas for the past year for example. This is another side of the problem; because of high housing prices here they (labor) expect to be paid more.
Q: But is the price of labor is so high, wouldn’t workers from other areas come here and increase competition for jobs?
A: Now the entry costs are so high at least to come into Southern California. In my business when we would advertise for a new job, we would get 15 applicants; today we get two or three. I think the situation will right itself when the adjustment comes. When this wave slows down later this year you are going to see a slowing of the economy.
Q: You are saying that with a six percent a year in increase labor and materials, it sounds like a bleak assessment for any prospect of a significant supply of new affordable housing?
A: Only if the upfront cost of the land is lower and there are lower governmental fees. The recent construction costs increase surprised everyone by the way.
Q: You have a small business, are you concerned with an “adjustment”?
A: I have a concern at the mid and lower salary levels just in getting workers; they are often choosing to go to other places. In addition, there is less loyalty that there used to be. You see people moving around for another dollar per hour.
Q: What kind of adjustment in housing prices do you see coming?
A: When I read these articles about a soft landing, like the UCLA study, I don’t believe them. I think there will be a correction in the 25% range.
Q: How does that square with your inflation scenario?
A: Does the Fed want to fight inflation or are they concerned more about recession? They will keep raising rates. I think that they are going to choose to fight inflation and risk a recession.
Q: This raises the specter of stagflation; a sluggish economy with rising prices. Does the war in Iraq affect your business in anyway?
A: Yes there is an impact; federal projects are being under funded because of funds being allocated to the war and for the effects of inflation. Essentially projects are not penciling out because of these two factors. Disasters like Katrina also have had an impact on building costs in San Diego as well.
Q: To conclude, you don’t seem to have any idea about the problem of affordable housing?
A: Yes I am hard pressed; I don’t know how you would do it. The one thing you can control is density; that is all you can do and that means changing what consumers expect in an entry level home. But keep in mind that the economics or the time of commuting from Temecula may force change, like the energy crisis did in 1974. People may decide the personal and economic cost of living there and working here does not offset the higher prices in San Diego. But I wish I had the answer.
Click here to see Jim's past Market Reports. You can also download Jim's 26 page research paper on San Diego County apartments. > Send me complementary, custom MLS listings
> Contact Jim Scott for more information or with comments at jimscott@sqre.com |
