Tuesday, June 17, 2008

Construction prices and affordable housing

According to the Turner Building Cost Index, construction prices keep going up. I don't expect this to change all that much for the foreseeable future, unless China and India stop growing. There has been a lot of attention recently to the residential market collapse, but other sectors have stayed healthy enough and so demand for building materials hasn't dropped that much:
Besides global supply and demand, the higher prices are due to increased energy costs for manufacturing and transportation.

"Overall, the domestic non-residential building markets continue to be active," said Karl F. Almstead, vice president at Turner Construction Co. in New York City. "The health care, education, science, technology and public sector market segments remain strong while commercial and retail have declined slightly and large-scale residential projects have slowed significantly."
I am among those who think the affordable housing crisis is a serious issue, and I also think that there is a public duty to ensure that quality housing close to employment and leisure activities exists. While I am less optimistic about housing solutions for those in poverty, I think that affordable housing has a much brighter future.

There are numerous programs and policy initiatives which can increase the stock of affordable housing units, namely inclusionary zoning, which the AHA has done fairly successfully with their Eastside TAD projects. The Home Atlanta program is also the sort of program I like to see.

While municipalities can influence affordable housing with these sorts of programs, in my experience two of the largest inhibitors of affordable housing are land prices and construction costs. Getting a development financed can be very difficult, and high land prices and rising construction costs only squeeze returns more.

It is easy to think that developers just want to push prices as high as they can, but sometimes you can be more successful undercutting the competition with lower priced units and move them faster. Like any industry, if you can lower production costs the equilibrium price of the product will drop.

I'm sure many developers would love to build a more affordable product, but if construction costs continue to rise it will be increasingly harder to do. A potential offset is if Americans start preferring smaller houses, which I have fantasized about before. Smaller units means lower absolute prices, even if the price per foot is still high.

Of course, anyone who has seen one of Novare's condo units or lived in NYC will question how much smaller we can go. I guess I am mainly talking about single family homes, and hoping for a revival of the bungalow at the expense of the McMansion. I think we tend to accumulate too much stuff anyway - in fact, we accumulate as much stuff as it takes to fill up our houses.

So I see some spiritual benefits to smaller houses, too. Those of you reading with children will undoubtedly think I am nuts. But y'know what? I shared a room with my brother until I was 9, and I got used to it. By the time I was 15 I wanted to spend as much time away from home as possible. I don't think that it is mandatory that every house be 3,000 sf.

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