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Strategies & Market Trends : Mish's Global Economic Trend Analysis
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To: koan who wrote (77776)4/16/2008 12:31:19 PM
From: Elroy Jetson  Read Replies (1) of 116555
 
Of course housing prices will rise when effective demand returns, that's obvious. Especially when demand is irrational as in the recent credit-bubble.

This is quite different from saying . . . "home prices will rise when building costs increase". . . . This statement is simply false.

Costs have a very casual relationship with the price of anything. This is precisely why real estate appraisers rely on the Cost Approach only as a last resort when all other methods have failed.

Even then people have a misconception of what "building costs" are.

In a down-turn as we are experiencing, land is currently selling for as much as 80% less than it was a couple of years ago. This discount will increase and affect infill lots more significantly as the downturn progresses. In California land is typically more than 2/3 of the "home building cost" - even more than 90% in coastal areas.

Having worked for a number of major home builders, as well as holding a Brokers License for 20 years, I can assure you that building costs in volume are a small fraction of what people imagine them to be or as they are published by Marshall & Swift for replacing one home burnt down in a fire.

Does construction cost affect home prices? Yes, in the very long run. In the short run, which can be a very long time indeed, construction costs are not relevant to home prices.
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