Real Estate Experts Begging Contractors For Homes

  • January 26, 2023
  • 3 min read

The U.S. real estate market is under the spotlight, with experts emphasizing the need for more housing. The rallying cry echoes across the industry, urging developers and contractors to pick up the pace and construct more properties. However, a closer look at the ground realities reveals a complex situation where the desire to build meets numerous hurdles.

The Urgency for More Housing

Headlines abound with quotes from real estate experts, highlighting the urgent need for additional housing in the United States. The rallying cry to developers seems clear: “Get out there and build us more housing.” But is it as simple as it sounds? A deeper dive into the dynamics of the industry reveals a more nuanced picture.

Developers Want to Build, But…

Contrary to the perception that developers are resistant to building, the truth is that builders and contractors are eager to construct. Building is not just their profession; it’s the source of their livelihood. The challenge, however, lies in the intricate combination of economic factors and rising costs that hinder the construction of new single-family homes.

The Cost Conundrum: Beyond Materials

While the cost of materials is often in the spotlight, it’s not the sole culprit. Delays in permitting and approval processes significantly contribute to the conundrum. In many regions, obtaining the necessary permits can stretch over eight or nine months, sometimes more than a year. During this waiting period, builders face mounting overhead costs, including equipment, materials, bonds, and insurance.

The Math of Building: Economic Viability

Even if a builder successfully navigates the permitting maze, economic viability remains a pressing concern. The scenario unfolds with a hypothetical situation: a builder invests $100,000 in site costs, permits, and fees before even breaking ground. If, miraculously, they manage to build a 1,000 square foot house at $200 per square foot, the total cost reaches $300,000.

Market Realities: Selling Challenges

The real challenge emerges when considering the market realities. With the average cost of a home standing at $400,000, selling the house for a profit becomes a daunting task. Even if the house is sold at $399,000, the builder faces additional costs such as carrying costs for a year, real estate commissions, and closing costs, effectively reducing the profit margin.

Risks and Assumptions: The Builder’s Dilemma

The intricate web of assumptions and risks becomes evident. Can a builder consistently construct houses at $200 per square foot? Will the housing market support the sale of these homes within a year? Are interest rates and material costs stable? These uncertainties make building new single-family homes a high-stakes game for developers.

Considering Alternatives: Commercial Projects

In contrast, commercial tenant improvements, remodels, additions, and upgrades present a more predictable landscape for contractors. These projects involve commissioned work, offering a level of assurance that speculative single-family home construction doesn’t.

A Call for Industry Reflection

As the real estate industry grapples with the pressure to build more properties, it’s crucial to recognize the challenges faced by developers and contractors. The need for housing is undeniably urgent, but understanding the economic realities and complexities of the construction landscape is equally vital. The conversation around building new single-family homes in the United States prompts reflection on the industry’s dynamics and the delicate balance between demand and feasibility. Share your thoughts on the state of affairs for builders and developers in the comments below.

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