In the middle of our current financial crisis, the united states national government’s interventionist policies have redeployed finite funds in contravention to market forces. Consumers and lots of custom builders have been pushing for superior quality, sustainable, energy efficient structure. Regrettably, these market forces are overcome by government intervention. The government has incentives for first-time buyers who generally buy cheaper starter homes. Consequently, almost all new construction is being undertaken by large tract builders who specialize in cheap housing. This end of the market is very cost sensitive leading these builders to continued with larger designs that give quality for size.
Contrary to this belief of the US Congress, capital cannot be made by printing money or deploying programs meant to create jobs. In a completely free market, capital is deployed efficiently to regions with the best yields. After the government intervenes, it may skew the usage of funds to less efficient businesses. History provides us with many examples, but we don’t need to look far back to find out among the very best.
The deep recession we’re experiencing led in large part from government interference in the housing market. The American dream has turned into the American nightmare. Successive governments, both Democrat and Republican, because the Great Depression have done everything they can to promote privately owned housing. Government bureaucracies such as the Federal Housing Administration and government-sponsored, today government owned, entities such as Fannie Mae and Freddie Mac artificially made a market for low-interest loans to high-risk clients. In a perfect storm, the Federal Reserve artificially depressed interest rates for a short-term economic boost.
Without artificially low prices and low credit criteria, it’s improbable that the creation of homes would have risen from 1.6M in 2001 to nearly 2.1M by 2005. Post deflation the home starts dropped to 554,000 in 2009. At the beginning of the growth, the Federal Funds Rate in January 2001 stood at 6 percent. When home peaked the rate had been lowered to 1 percent. Not only did the volume of building increase during that time, but the size of homes increase dramatically as did the price. Consumers were invited by lenders to buy the largest home they can afford to take advantage of a once in a lifetime opportunity. The capital which may otherwise have been employed in different areas of the market was set up in the home at artificially low rates. The end result was catastrophic.
The exact same government is intervening through first-time homebuyer tax credits. Coupled with low-interest FHA loans with 3 percent down payments, they’re creating some of the formerly existing problems. In addition to risking a single bubble, the tax credits funded by all taxpaying Americans are being funneled to big company contractors that specialize in a low-income home. This is evidenced by the drop in the median sales price in 2009 to $209,000 in the top of $262,000 in 2007.
A number of the bigger builders have developed smaller plans, but they have mostly done so to meet the lower price points which the authorities influenced market demanded. They are not increasing the quality, sustainability or energy efficiency of the homes. Though not all large home building has ceased, just the really wealthy, who are inclined to build better-constructed houses, are still building. Homes of this quality usually include energy efficient systems and continue more; the two attributes of the sustainable structure. Much was written about”McMansion” houses, but generally, homes in this market are not included. That is a discussion for another day.
Whilst tract home builders dominate the starter house section, custom contractors control the massive home market. The actual battle will be to your”move upmarket”. This market will determine the character of American housing in the near future. Proceed consumers will choose between low quality, lower-cost homes built by big company builders and high quality, higher-cost homes built by small custom builders. Given the same available dollar for building, the tradeoff is the dimensions for quality.
Assuming market forces determine financing limits, the average price of houses from the transfer up section will probably stay considerably lower than previously experienced. At the peak, the move up segment ranged easily into the 1M plus range. Those who grew accustomed to the quality of high priced houses won’t probably abandon their affinity for hardwood floors, commercial-grade appliances, custom cabinets and granite tops. To match those features with a lower overall budget, consumers need to build smaller, more high-tech houses. The skill set to build these homes lies with all the custom builder.
If Americans are truly interested in reducing dependence on foreign energy and raising sustainability in the home market, we will have to decide to build smaller homes to offset the high cost of excellent construction. Although it is possible that tract builders might choose to build smaller, their main advantage currently is providing substantial size for a low price. Their organizations aren’t set up to deal with the custom aspects that would make their home sustainable or more energy efficient. Through builder association programs custom builders have become more educated in energy efficient and sustainable construction to go along with their intrinsic quality.
The issue now is whether the authorities will continue to incent consumers to continue a behavior pattern contrary to free market forces. If all new building continues in the very low end of the current market, it will drive most of those rest of the builders from the market. Already the amount of contractors belonging to professional associations such as the National Association of Home Builders has been radically reduced. Many small custom builders are surviving only through remodeling job, but if the market continues much longer many will probably move to additional work. Rebuilding the knowledge base and expertise can take decades and impact the overall quality negatively for the entire year to come. www.reidsheritagehomes.com/