

1/3 of US Homes Cost More to Build Than They're Worth - masonhensley
http://blogs.smartmoney.com/advice/2012/04/17/homes-cost-more-to-build-than-they%E2%80%99re-worth/

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aristus
Title is editorialized and misleading. "One third of builders said that some
homes were appraised at less than they were built for" is NOT equivalent to
"One third of homes are appraised less than their worth".

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mindslight
That's it?! Maybe one third is accurate for new-construction cookie-cutter
homes where turning undeveloped land into a neighborhood contributes to the
profit. But after pondering the financials versus replacement-cost of a metro-
Boston historical house that I'm currently involved with, I can only come to
the conclusion that building a new home (and major renovations in general!)
should be seen as _luxury spending_ on one's specific desires, _not_ justified
as some sort of nebulous "investment".

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delsarto
> not justified as some sort of nebulous "investment".

I can never understand on these HGTV shows how someone does $X work to a
house, then they get appraised and someone says "you increased the value of
the house by Y%". There's even a whole show based around it which I can't
think of, where they appraise your upgrades and how much value it added.

Strictly speaking, I'd think that the moment the construction workers walked
out, you had increased the value by $X, i.e. whatever it just cost you to get
them to do the work, and from that moment on it's depreciating. Maybe there is
some "convenience" factor if you sold right then as the next person wouldn't
have to bother with the upgrade; but they're also not getting new renovations
(and presumably warranty, etc). Why is your house suddenly worth so much more
when all you did was get a kitchen guy to come in an do his thing?

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Lazare
Increased the value by $X? Oh heavens no, that's far too optimistic.

You see, one of the joys of being a homeowner is that you have the option of
improving your house so it's better to live in...for you. That might mean
granite countertops, or that shade of fuchsia you LOVE on the bathroom walls,
or a hot and cold running Pepsi, or a built in movie theatre, or a library,
or...well, whatever it is you, personally, like.

We can assume that - unless you screwed up or got ripped off - that you
personally value whatever improvements you make at more than their cost. "Wow,
the main hallway is a halfpipe so I can practice my skate moves! I'd have paid
$50k for that, but it only cost me $30k to have it built! SCORE!"

But, human taste being what it is, the next guy probably doesn't value
whatever you built as highly as you do. Pretty much everyone likes stuff like
having a closet in every bedroom; that's why houses tend to have them. But not
everyone really cares about having a mirrored ceiling in the kitchen (perfect
for cake decoration!). The fact that every house doesn't have them is a good
sign that most people value this "wonderful" feature as being less valuable
than the cost to install it.

Which is why, as a general rule, and with a few very specific exceptions, any
improvement you make will always add less than $X to the market value. There's
a few areas where you _might_ be able to break even or even gain on the deal.
If there's a gaping hole in the lounge, fixing that is probably worth it. Sure
the next owner could fix it too, but you're going to have a hard time selling
it like that. If you have vintage 1970s shag carpets and avacado wallapper,
this might also be a good candidate. (Although you might luck into finding a
buyer who'll pay _more_ for the nostalgia value, I guess...)

But everything else (and especially any remodelling of an otherwise perfectly
functional kitchen or bathroom just to add nicer fittings, which is stupidly
common mistake) is almost certainly going to lose you money if you're just
looking to sell the house. If it costs $X, it will (almost) always add much
less than $X to the market value.

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cowkingdeluxe
There's not many facts or statistics in this article, more of an anecdote. I
highly suspect it's more of a "we're mad because we can't sell houses for
insane prices like we could in 2007 so we're going to paint ourselves as the
victim."

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kevinpet
"Cost more to build than they are worth" means "we built something in hopes of
turning a profit, and in fact, we can't sell it for as much as we planned, so
we won't turn a profit."

This isn't a mysterious conspiracy on the part of appraisers. They shouldn't
have built those houses that aren't worth enough to cover the cost of building
them.

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roel_v
Did you even read the article? The point is that when people want to have a
home build, they get a quote from a builder, agree on a price, then go for a
mortgage. To get one, the house (that is yet to be built) needs to be
appraised. It's about _those_ appraisals that the article is about - the
houses are appraised at _less than they can be built for_ , even when nobody
has turned a profit yet (well the builder turns a 0.5 % profit on average,
according to the article).

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kevinpet
Yes, I read the article. The bank is telling them "you are stupidly
overpaying, our risk is based on the resale value of the collateral, and we
think the collateral is only worth $X, so we are not going to loan you more
than 80% of $X."

Putting this magic voodoo phrase "less than they can be built for" in italics
does not make it any more meaningful. Some other things that can't be made for
less than they are worth: manual typewriters, augmented reality glasses, 50
foot butter sculptures of Mickey Mouse. It happens that right now in our
current housing market, there is a surplus of existing homes which means it is
not economical to built houses. Now, it seems unlikely that this is a
permanent state of affairs (since houses, unlike manual typewriters, are still
in pretty high demand).

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meric
Just practicing thinking through this with my knowledge of finance and
economics...

The _worth_ of an _investment_ is the sum of all its discounted future
cashflows multiplied by some sort of risk factor that depends on standard
deviation of those flows, plus the value of the option of being able either to
expand or liquidate the investment at any time. The _price_ of an _investment_
can be different to their intrinsic _worth_ (which can only be estimated),
especially during peaks of booms and busts.

The _worth_ of a _consumer good_ is how much marginal benefit the consumer
derives from the good.

By saying "1/3 of US Homes Cost More to Build Than They're Worth", they imply:

1\. For new homes that are investments, the current price is too high compared
to their intrinsic worth.

2\. For new homes that are built to be lived in, somehow the marginal benefit
derived by the owners has now dipped below the cost to have built it. Dang.

Of course, [2] sounds ridiculous. So the third of homes they are referring to
must all be investments.

They want to say house prices are going to keep falling because its still too
high, and that no one is buying new homes, so fewer people will build them.
What happens if no one is building new homes? Supply is reduced...

What happens then is now left as an exercise to the reader.

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dsil
99% of US Software costs more to write than it's worth.

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Tangaroa
Reactions:

1\. It's worse than it sounds because home prices include land. If the article
is true, it often costs more to build a home than that home _plus the land_ is
worth.

2\. House prices are still inflated. Adjusted for inflation, houses probably
cost two to three times as much as they did ten or fifteen years ago. What has
made home building so much more expensive that the inflated home prices do not
cover the costs of building them? It's not labour; the unions were broken by
the importation of illegal immigrant labour in this time period and the labour
costs have gone down. So why are the costs so much higher?

