Is a Mini Bubble in the Making?

    By: Henry Rabell
    Sr. VP with Bosshardt Realty Services, LLC

    It was a remarkable rebound year for most new home builders. A perfect storm of low interest rates, competitive labor costs, fewer short sales and foreclosures combined with the lack of desirable inventory to spawn the new construction, home sales bonanza of 2014. This mini boom was underpinned by subdivision lot prices. It appears that, in many cases, such lots were purchased by savvy builders at a fraction of their original purchased price via foreclosure sales, or by developers simply cutting their losses on their original capital investment. This mix of factors catalyzed the new home sales resurrection. Builders were able to use the money saved from discounted lot prices and apply it toward enhanced home features. In turn, these bells and whistles, along with prices that rivaled older, less efficient used homes, motivated home buyers. Think about it: The benefits of a new home which includes granite counter tops, crown molding, energy savings components, a modern kitchen and space designs, plus new, unblemished carpet versus the costs associated with updating a used home in need of an eventual roof, AC unit replacement or deferred maintenance issues (often left over by the previous home owner)—and the new home became the undisputed, relative bargain.

    With new home sales seemingly on the rebound, home builders are regaining confidence—in a big way. The 2015 lineup of new developments are popping up like popcorn around Gainesville’s perimeter. Like a pendulum suspended too far in one direction, builders and their trades, like Tarzan on a vine, are swinging full speed in the opposite direction.

    Pre-2015 builders were able to purchase stalled subdivisions which had builder-ready lots with roads, sidewalks, sewers and infrastructure, in place) at steep discounts. But, a new era of builders are charging into lots like a bull towards a capote. The land being developed for these new home sites, in most cases, was purchased for top dollar at the peak of the market cycle, just before the crash. Adding in the lost opportunity costs (while the dirt sat dormant for close to a decade), the cost of interest payments, newly imposed regulations, higher wages for the trades, as well as materials, it doesn’t take a mathematician to quickly figure out something: These new subdivision lots are costing three to four times more than what previous builders could scavenge prior to 2015; in a nut shell, these higher costs will have to be passed on to a new home. In many cases, prices of new homes for 2015 have shot through the roof: $20, $30, $60K, year over year, overnight!

    A well-appointed home pre-2015 was approximately $110-160 a square ft. with $180sq being the exception. Today’s average home starts in the $140s and runs to over $200 per sq. ft. We are seeing a 20%+ increase across the board. What is more alarming, however, is the concentration of large, new subdivisions with a combined 2000 plus lot inventory—located within several miles of each other and offering homes in the upper $300-$400s. When you consider the MLS data for 2014 showing less than sixty total new homes sold in that price range, one begins to wonder: Is a mini bubble in the making?

    One possible outcome of this may be good news for used home sales. The dramatic cost shift for new homes may produce an inverse opportunity for the used, older home market where upgrades or “honey-do” repair lists begin looking desirable. All this may serve as a catalyst to stabilize (or even put upward pressure on) pricing for well maintained and updated homes. Perhaps this is especially true for homes in close proximity to the newer subdivisions.

    A bubble in the making is hard to predict and will likely depend on a few micro and macro moving targets: Interest rate hikes, inventory levels, job growth with above average paying salaries, and absorption rates will play a role in real estate’s crystal ball. One thing is for sure, though. The 2015 real estate market will present buyers and sellers with risks as well as opportunities; with the guidance of an informed, trusted and reliable real estate agent, the buyer can make an educated, optimal decision.

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