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Wednesday, June 28, 2006

New Construction Costs In Seattle

In a recent post in his continuing series on whether or not Seattle is in a bubble, Gregory Wharton took a look at the actual cost of producing new houses. After doing a bit of math on construction costs, he made the following claim:

...the comparative value of new construction for the median Seattle home is $326,600 not including land.
That would actually be a pretty solid reason for housing prices to be as high as they are right now... if it were true. See, the thing is, I'm not convinced that it is true. Most of you probably read the news reports yesterday proudly proclaiming that sales of new homes nationwide were up in May. In those reports was an interesting tidbit of information about the price of these new homes:
The median price of a new home did drop to $235,000 in May...
So, nationwide the median new home is selling to the consumer for $235,000, but in Seattle the cost to the builder to construct the median home is $326,600? $235,000 is the actual median sales price across the entire US, and does include land. Making what I think is probably a low-ball assumption that only 15% of the cost of these homes comes from the land itself, and allowing for developer profit of just 5%, the construction cost estimate obtained by looking at the actual median sales price comes in at $188,000—over 42% lower than Mr. Wharton's estimate.

So here's my question: Are construction costs in Seattle really 70% higher than the nation as a whole (without figuring land into the equation), or are Mr. Wharton's numbers a bit... off?

(Gregory Wharton, Seattle Real Estate Professionals, 06.21.2006)
(Martin Crutsinger, Seattle P-I, 06.27.2006)

Update: Mr. Wharton posted the following response in the comments, and I feel it is only fair to add it to the main post:

As the original author of the linked article, A few things:

1) Of course the numbers I use are retail in the sense that they include both material and labor cost at market rates. Most homebuyers are not in a position to build for wholesale prices, which can be much lower, and must also pay site supervision costs as well. Even my architectural clients have to pay retail unless they themselves are builders (which some of them are). Some builders are able to consistently build at low prices (Quadrant is an excellent example: they build at the very low end of the market and get all their lumber dirt cheap because they are part of Weyerhauser). Many are not. In fact, most large builders with efficient cost structures won't build right in the city because the costs are too high and blow their financial pro formas apart.

2) Construction costs in major cities are very much higher than they are outside of cities. There are a variety of reasons for that, but it's been consistently true for a very long time. I'm not comparing Seattle real estate prices to construction costs in Duluth, Iowa, nor to the national averages. I'm comparing them to construction costs in Seattle, Washington.

3) Six years ago, it was still possible to build a mean-level single-family detached house for about $100 to $110 per sq. ft. in Seattle. Those days have long passed. Now, to get into that price range, you have to cut lots of corners. The Quadrant homes I mentioned above typically don't have a lot of what we might consider basic features: base trim, appliances, and a bunch of other stuff. To get that, you have to pay a premium upcharge (that's where a big part of their margin is, actually).

4) Quality is a big issue being ignored by many of your commenters. If you were to actually try and rebuild many of the 1920s bungalows so prevalent in Seattle to the same quality level of finish they currently have, your construction cost would be well over the $160/sf number I was talking about (actually, it would be north of $200/sf). I know this because I've had clients ask me to do just that and it's amazingly expensive.

4) I am aware that Seattle is usually about 1.4 times the national average for construction cost. That number has been going up...a lot...in the last two years. From what I'm seeing in cost estimates during the last 24 months, I think the multiplier is now more like 1.5 to 1.6.

5) Even if we assume I'm off by a bit per sq. ft., the argument still holds. At $145/sf (the 1.4 multiplier from national average, rounded down to the nearest $5 increment), the mean 1,720 sq. ft. home has a hard cost of about $250K, not including land or soft costs or anything else. Add 20% soft cost and you get $300K. Since land premiums are running very high as well (as noted in the chapter following the linked one) add a round $125K for land cost for a city lot (which is actually on the low side if you go and price these things out) and you are now right at the median home sale price for May 2006 of $427K.

For all these reasons and more, I stand by my analysis.

26 comments:

Anonymous said...

His numbers appear to be wrong. I just looked over some recent developments and their projected costs for higher end stuff are in the range of $100/SF to $110/SF without the land, including soft costs but without profit and land. For average quality, $70/SF to $90/SF. A guy I know is building a house of above average quality at $120/SF with some upward pressure due to unique circumstances.

Anonymous said...

Our minimum wage is $7.something an hour vs $5.something elsewhere, but I can't believe it makes that much of an impact.

Anonymous said...

National average, construction costs for a single-family, detached home runs an estimated $105.35 per square foot

I think the $70/SF is a bit low in the Northwest... usually the NW has a 1.2 - 1.3 multipling factor on top of the National average... so I think a more appropriate "estimate" would be in the $130 per square foot range for a quality "average" home... and this is for single homes not 1000 unit developments.

So, after all that... my estimate for an average "quality" home would be $195,000 (construction costs only) for a 1500 sq/ft home... without the land, permits etc. and it would probably incur an additional premium if it was built inside of the Seattle city limits.

Anonymous said...

National Home Builders http://www.nahb.org/generic.aspx?sectionID=123&genericContentID=51646

Anonymous said...

Thanks, Anon 12:40. That's a useful link for this discussion. It's interesting that the NAHB lists the National "average" home, rather than the median home. Perhaps that disconnect is the problem.

This is a particular disconnect for me since a friend of mine paid $80k in Arlington, Texas for a 2,000 sf home two years ago. According to the NAHB, that would cover "Framing and Trusses", "Excavation and Backfill", Plumbing, and Countertops. I guess the rest of the house (land, fees, etc) was free.

Honestly, with prices as low as they are, builders must be losing money even with current sky-high housing prices.

Anonymous said...

Maybe the disputed "cost to build" figure uses retail prices instead of wholesale for the building materials? That's the only other thing (in addition to what people above have mentioned) that I can think of that would cause much of a disconnect. Weird.

bobbyj0708 said...

I've been a purchasing guy for a couple large builders in the Seattle area, currently doing the same gig in Orange County.

You're looking at a range of $55 to $70 per SF for sticks and bricks to build a home and $35k to $45k per lot to develop the raw land. Permits vary a lot, but you would probably spend an additional $25-$30k for those per home. Basically would run $85-$100 per SF, no land included.

These are costs for guys doing several hundred homes a year of average quality. Custom and semi-custom would of course be more.

But these numbers don't come close to the total cost of a home. Additionally you have sales, marketing, interest, insurance, overhead/general conditions, and a number of other costs. It's not reasonable to look at just the hard cost of home to see if a builder is making too much money on a home.

Anonymous said...

Anon 03:20:34:

The one custom-builder that I know told me that he gets his materials at deep discounts and charges his clients full retail prices.

Michael said...

Texas homes are cheap... dirt cheap... but they've also got an endless supply of cheap labor.

Anonymous said...

When construction cost is high, people complain because they can't afford to buy a home. When construction cost is low because of illegal immigrant workers, people complain because legal citizens are screwed out of a job. You can't win.

mike said...

One very positive factor in Seattle's favor is the distance from Mexico. The amount of illegal immigrant labor just isn't as prevalent as in CA, TX, AZ, etc. Cost of construction is higher here.

On the other hand, there's not state tax and property taxes are lower here. TX is over 2%/year I believe. CA is 1.25% around the Bay Area (not sure about LA/SD). There are some good incentives to living in Seattle that offset the housing costs.

mike said...

BTW, when I said "positive" I meant positive justification for the high cost.

Anonymous said...

I got a quote for my home to be built at $115.00 a sqft (no land). Hes way the hell off. Thats in California

Anonymous said...

National home builder costs are between $50 and $55 per square foot in California. Add permit and impact fees based on your locale. These could add another $25 to $50 per square foot. Not included is the cost of the finished, ready for construction lot and home builder profit on the house and the land - usually at 10%.

gregory.wharton said...

As the original author of the linked article, A few things:

1) Of course the numbers I use are retail in the sense that they include both material and labor cost at market rates. Most homebuyers are not in a position to build for wholesale prices, which can be much lower, and must also pay site supervision costs as well. Even my architectural clients have to pay retail unless they themselves are builders (which some of them are). Some builders are able to consistently build at low prices (Quadrant is an excellent example: they build at the very low end of the market and get all their lumber dirt cheap because they are part of Weyerhauser). Many are not. In fact, most large builders with efficient cost structures won't build right in the city because the costs are too high and blow their financial pro formas apart.

2) Construction costs in major cities are very much higher than they are outside of cities. There are a variety of reasons for that, but it's been consistently true for a very long time. I'm not comparing Seattle real estate prices to construction costs in Duluth, Iowa, nor to the national averages. I'm comparing them to construction costs in Seattle, Washington.

3) Six years ago, it was still possible to build a mean-level single-family detached house for about $100 to $110 per sq. ft. in Seattle. Those days have long passed. Now, to get into that price range, you have to cut lots of corners. The Quadrant homes I mentioned above typically don't have a lot of what we might consider basic features: base trim, appliances, and a bunch of other stuff. To get that, you have to pay a premium upcharge (that's where a big part of their margin is, actually).

4) Quality is a big issue being ignored by many of your commenters. If you were to actually try and rebuild many of the 1920s bungalows so prevalent in Seattle to the same quality level of finish they currently have, your construction cost would be well over the $160/sf number I was talking about (actually, it would be north of $200/sf). I know this because I've had clients ask me to do just that and it's amazingly expensive.

4) I am aware that Seattle is usually about 1.4 times the national average for construction cost. That number has been going up...a lot...in the last two years. From what I'm seeing in cost estimates during the last 24 months, I think the multiplier is now more like 1.5 to 1.6.

5) Even if we assume I'm off by a bit per sq. ft., the argument still holds. At $145/sf (the 1.4 multiplier from national average, rounded down to the nearest $5 increment), the mean 1,720 sq. ft. home has a hard cost of about $250K, not including land or soft costs or anything else. Add 20% soft cost and you get $300K. Since land premiums are running very high as well (as noted in the chapter following the linked one) add a round $125K for land cost for a city lot (which is actually on the low side if you go and price these things out) and you are now right at the median home sale price for May 2006 of $427K.

For all these reasons and more, I stand by my analysis.

biliruben said...

Thanks for stopping in and sharing your numbers and the reasoning behind them, Greg.

Regardless whether I agree, it is very cool for you to respond.

I am curious whether the multiple increase for the last couple years is due more to labor or materials?

Do you foresee that multiple remaining high if/when demand slackens in the future?

Anonymous said...

Still not buying it. A guy in my office just built a house with above average finishes and it was $120/SF retail.

By the way: Duluth is in Minnesota.

Anonymous said...

Anyone got any ideas how someone wanting to build a home could get below retail prices on building materials without being a builder? I would think that with the markup that builders get that some of them would be willing to pass along the savings they can get. I had thought that was one of the major reasons to work with a good builder - that they could save you some money on materials. How do you find the builder who will discount? Any other ideas?

Anonymous said...

His numbers appear to be right. There is no way that higher end construction is $100/SF and lower end is less than $100/SF. Low quotes are given all the time, actual costs are much higher.

Anonymous said...

His numbers are wrong. Maybe it's because he is an architect and the typical projects that he works with are custom jobs.

Doing a quick calculation, I see that the median home of 1,720 square feet has a construction hard cost replacement value of about $284,000. Adding in 15% soft cost, the comparative value of new construction for the median Seattle home is $326,600 not including land. That is certainly less than the median home sale price of $427K, but not by so much that we should immediately think we're seeing a bubble in real estate prices.

Show me where I can buy a lot in this city for $100,000. And where is the profit component? Take a ballpark number for a finished lot of $250k (which is probably low by at least $50k). Add in a profit of 20% (which is likely low) and you are at $750k for a 1,720 SF house. That is preposterous. I can buy a helluva lot more house than that for $750k.

His numbers are flat wrong.

Anonymous said...

Oh my God I just saw his line about $125k for a lot. That convinces me that this guy does not have a goddamn clue what he is talking about. Seeing as you are a "developer" who works with a lot of budgets, how's about you go down and see what the builders are paying for lots in SE King County. Bulk sales of plats with 40+ lots are selling with no discount at $175k to $190k PER LOT. Are you inferring that lots in Seattle are less desirable and therefore sell for less money?

Total nonsense.

gregory.wharton said...

Biliruben,

In response to your question about material/labor escalation:

In the last 12 months, steel is up 45%, lumber is up 35%, cement is up 40%, copper is up so much I'm not even sure how to keep track anymore without checking the latest spot prices. Material costs are escalating very rapidly in many if not most sectors. That doesn't even count the very high cost of oil, which is not only necessary for fuel on construction sites and shipping of materials, but is also a key ingredient in many, many building products.

Labor costs have also been increasing at a similar pace. Partly this is due to increased demand and the ability for subcontractors to cherry-pick jobs.

The increases we've been seeing have been about evenly split between labor and material escalation, although labor escalation has become more important in the last 9 months.

To a certain extent, the bull market in real estate has been exacerbating construction cost escalation, so a softening market may reduce the multiple a little. However, construction costs are likely to remain high for three reasons:

1) Inflation is continuing apace and the Fed seems unable to really do much about it without causing a full-blown deflationary depression,

2) Much of the material escalation is being driven by dramatic increases in demand outside the US, China and India in particular (for the last three years running, demand for structural steel in China has been about one third of the entire world's steel output and growing), and,

3) Americans aren't interested in pursuing careers in the construction trades anymore, resulting in a severe labor shortage.

Anonymous said...

Gregory Wharton-

Do you honestly believe that Americans are not interested in pursuing jobs in the construction trades any more?

You must be a youngster.

Construction used to be a very good paying job that could support a family (off of one income!). Yes! Buy a home and all!

It was a great trade that many were proud to engage in.

Lord. This country is going to hall in a handbasket. and it seems as though everybody is cheering it on.

Anonymous said...

Every single family and multi-family project that is listed in the portfolio at Meng is "elegant" or "high end".

They have designed two retail projects--one for a company that has since entered bankruptcy and the other was for 14,000 SF of space--not exactly "multi-million-square-foot mixed-use commercial centers" as his bio on the P-I site claims.

All of their other projects are for public agencies and we know how responsible they are with taxpayer dollars.

Anonymous said...

Hey, "Anomymous" guy who keeps stating Gregory's numbers are way off: First of all, his responses are very professional and yours are completely unprofessional and rude. Second, why don't you log in as something other than anonymous and give your background if you're going to be making such a big stink about his info being incorrect? It's fine to disagree if you think his facts are off but why don't you do it in a professional manner and quit hiding behind your "anonymous" status.
Signed, Lara

CS Inc Homeowner said...

The hidden cost of new construction is dealing with shoddy builders who screw over their customers. We just moved into a new subdivision built by CS Inc and the majority of home owners have so many problems that we decided to put up our own web site (http://csinchomeowners.blogspot.com) to warn other prospective buyers.