"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.
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).
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).
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."
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".
> 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?
Fundamentally they're goading people to spend money on themselves and call it "investment". Sure, some improvements can certainly make a buyer value a house higher than the cost of doing the improvement (for example, one busted-up room or lots of peeling paint could cast the whole house in a bad light regardless of the rest). But your $20K new kitchen is most likely never going to specifically be worth $20K to someone else (especially after time passes). However, another large part of the problem is that a bank will deny/scrutinize giving a new homeowner an additional loan to remodel their kitchen, but an already-done kitchen will be included in the appraisal for the mortgage.
That's not the whole story, though. Sometimes you need to remodel just so you can sell your home, i.e. make it competitive with the neighborhood. We're a couple of months away from rehabbing our master bathroom because it's so bad that it would be hard to resell it in this market. So, I think you're looking at it from the wrong perspective. It's not a strictly calculable amount when you re-hab a home--part of the subjective monetary value is what a future owner doesn't have to do after making a purchase.
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.
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".
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?
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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[ 3.4 ms ] story [ 46.0 ms ] threadThis 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.
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).
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?
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.
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?
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.