By David Nielson | Boomerang Capital
TL; DR: new builds are not the same as newly renovated ones.
Builders are having a rough go of it. Construction costs are up, homes aren’t selling as fast as they predicted, and they feel bad about it – actually really bad – and they have for quite a while. Here’s a bit of a sampling of headlines:
US housing market in ‘free fall’ as builder confidence suffers ‘disastrous’ drop: economist
Housing Market Recession: Home Builders Warn Collapse Is ‘Unsustainable’—And Prices Could Tumble Another 20%
U.S. home builder sentiment falls for 10th straight month – NAHB
With all that awfulness out there, what does that mean for people buying homes and adding value (aka ‘flippers’)? The answer is – not much.
The first difference between new-construction and value-add real estate investors is that the new construction product is a more expensive product and homes that are more expensive have fewer buyers. The average home in Phoenix sold price for $439,500 in October, while the average new build is listed at $639,432. While the headline above of new build prices possibly ‘tumbling’ 20%, it looks like even more than that could be needed to get to a price relative to other substantially comparable homes available. And while Scottsdale coming in at $1,640,432 should come as little surprise, you don’t get too much respite from some of the further out and less expensive locales: Surprise will cost you $515,010; Queen Creek even more at $725,597, and Buckeye in the middle but still very expensive at $545,845. There is also a greater demand for lower to mid-priced homes by first-time home buyers, which represent the largest body of buyers. In fact, there are probably more first-time home buyers than at any time in history.
While much of that considerable premium is due to builder choice, construction costs have not been helping either. New construction requires more materials, as a percentage of the cost than a home that has been refreshed. Everything is new in a build, and while that definitely has some benefits for buyers, it also comes at a cost. For example, lumber prices have been quite volatile but are still higher than a few years ago and are estimated to have added $14,000 to the average new home build. And while a renovation will use some lumber and other materials just as a new build would, it is obviously much less.
Longer development times also come with the territory of new builds. Product becoming available for sale has been in the pipeline for a year or more. Factors such as land acquisition, infrastructure like roads and curbs, permitting, etc. all influence the deliverability of a new construction home. And after all that, there is still the time required to build the actual homes. It was a quite different market and outlook when the final product, now sitting finished but unsold, was started. Value-add developers have much less, if any, of those mitigating factors to deal with. They can be much nimbler, which can be used to considerable advantage in both rising and falling markets.
New builds by their nature are further from city centers, meaning the commutes from where people need to be outside the home require more time sitting in a car. On the other hand, redeveloped homes are right in the middle of the action, in fact frequently even more so as the towns and cities have grown up around them. And since there are so many more existing homes than new builds, a buyer can choose their exact location and will know exactly what the neighborhood will be like, because it is already there.
Apples and oranges are still both fruit though – new builds and renovated homes likewise share some important conditions. While seasonality, elevated interest rates, the perception of deeply falling prices (incorrect, but nonetheless makes it tough), looming economic headwinds, depressed consumer confidence, etc. all influence buyers’ desires or ability to purchase any home.
The current market for homes has some challenges to be sure, but not all available homes are alike. New construction is materially different than the buy and renovate market and is having a tough go for a variety of reasons unique to them: higher price points, further out, and a more difficult development process. These don’t need to be concerns for renovators.