In the midst of our current financial crisis, the US national government’s interventionist policies have redeployed finite resources in contravention to market forces. Consumers and lots of custom builders have been pushing for better quality, sustainable, energy efficient construction. Regrettably, these market forces have been overcome by government intervention. The government has incentives for first-time homebuyers who typically purchase cheaper starter houses. Consequently, virtually all new construction has been undertaken by large tract contractors who specialize in affordable housing. This end of the market is very cost sensitive leading these builders to lasted with bigger layouts that sacrifice quality for size.
Contrary to this belief of the US Congress, capital can’t be created by printing money or authorizing programs meant to create jobs. In a free marketplace, capital is set up economically to areas with the best returns. After the government intervenes, it may skew the use of funds to less efficient businesses. History provides us with many examples, but we don’t need to look far back to see one of the best.
The profound recession we’re experiencing resulted in large part from government interference in the home market. The American dream has turned into the American nightmare. Successive governments, both Democrat and Republican, since the Great Depression have done what they can to encourage privately owned housing. Government bureaucracies like the Federal Housing Administration and government-sponsored, now government owned, entities such as Fannie Mae and Freddie Mac unnaturally created a market for low-interest loans to high-risk customers. In a perfect storm, the Federal Reserve artificially depressed interest rates for a short-term economic increase.
Without unnaturally lower rates and very low credit standards, it is unlikely that the production of homes would have risen from 1.6M in 2001 to almost 2.1M by 2005. Post deflation the home starts dropped to 554,000 in 2009. At the Start of the expansion, the Federal Funds Rate in January 2001 stood at 6 percent. When home peaked the rate had been lowered to 1 percent. Not only did the quantity of construction increase during that time, but the size of houses increase dramatically as did the price. Consumers were invited by lenders to buy the most significant home they could afford to take advantage of a once in a lifetime opportunity. Capital that might otherwise have been used in different regions of the economy was set up in housing at artificially low rates. The end result was catastrophic.
The exact same government is intervening through first-time homebuyer tax credits. Coupled with low-interest FHA loans having 3 percent down payments, they are creating a few of the formerly existing conditions. In addition to risking a single bubble, the tax credits financed by all taxpaying Americans are being funneled to large company builders that focus on low-income home. This is evidenced by the fall in the median sales price in 2009 to $209,000 in the top of $262,000 in 2007. Click here to learn more!
A number of the larger builders have evolved smaller programs, but they’ve mostly done so to meet the lower price points which the government influenced market required. They are not increasing the quality, sustainability or energy efficiency of the homes. Though not all massive home construction has ceased, only the really wealthy, who tend to build better-constructed homes, are still building. Homes of this quality usually include energy efficient systems and last more; the two attributes of the sustainable structure. Much was written about”McMansion” homes, but generally, houses in this marketplace are not included. That’s a discussion for a different day.
While tract home builders dominate the starter house section, custom builders control the large home industry. The actual battle is going to be for the”transfer upmarket”. This marketplace will determine the nature of American home for the near future. Move up consumers will choose between low quality, lower-cost homes built by large corporate builders and higher quality, higher-cost homes built by small custom builders. Given the same available dollar for construction, the tradeoff is your dimensions for quality.
Assuming market forces determine financing limits, the average cost of homes from the move up section will probably stay considerably lower than previously experienced. At the summit, the transfer up segment ranged easily to the $1M plus range. Individuals who grew accustomed to the quality of high priced houses will not probably abandon their affinity for hardwood floors, countertops appliances, custom cabinets and granite tops. To match those attributes with a lower total budget, consumers will need to build smaller, more high-quality homes. The skill set to build those homes lies with the custom builder.
If Americans are really interested in reducing dependence on foreign energy and increasing sustainability in the housing market, we will have to opt to build smaller houses to offset the higher price of excellent construction. While it’s likely that tract builders might opt to build smaller, their principal advantage currently is delivering large size for a low price. Their organizations aren’t set up to take care of the custom facets that could make their housing sustainable or more energy efficient. Through builder association programs custom builders are now much more educated in energy efficient, sustainable construction to go along with their intrinsic quality.
The issue now is whether the authorities will continue to incent customers to continue a behavior pattern contrary to free market forces. If all new building continues in the very low end of the current market, it will drive many of those rest of the custom builders from the marketplace. Already the number of contractors belonging to professional organizations like the National Association of Home Builders has been drastically reduced. Many small custom builders are living only through remodeling job, but if the market continues much longer many will probably move to other work. Rebuilding the knowledge base and expertise can take years and affect the general qualifications for the year to come.