Many Homes Now Worth Less Than What They Cost To Build: Report

It’s a tough time to be a home builder -- especially now that so many houses aren’t worth what it costs to build them.

That’s the surprising finding of a recent report from the National Association of Home Builders. About one out of every three builders is now grappling with a dismaying problem: once the homes are finished, an appraiser comes around and declares that they’re worth less than they cost to construct, according to the report cited by SmartMoney.

That’s bad news in a market where housing sales are already far from robust. Persistently low prices and an overall climate of economic uncertainty are keeping many would-be homebuyers from taking the plunge.

The lack of momentum in the housing market, in turn, is thought to be a major factor keeping the economy in low gear -- not to mention crowding out low-income renters as more and more people are skittish about buying.

Selling a newly built house presents a special set of challenges -- not all of which have to do with home appraisers, a group the NAHB has been quick to criticize in the past. As SmartMoney notes, the market is already flooded with cheap foreclosed properties, which homebuyers are more likely to turn to. New-home sales fell in February to a number about 10,000 less than what analysts expected, according to CNN.

There are already more than 10 million vacant homes in the country, according to some estimates, but the supply of new houses seems on track to keep going up. Builders requested the most permits in March for new construction projects in three and a half years, according to the Associated Press.

That’s good news as far as unemployment is concerned -- an NAHB economist told CNN last month that three jobs are created for every new house that gets built -- but it remains to be seen what kind of effect it will have on a market where housing supply already far exceeds demand.

Correction: A previous version of this article ran with the headline, "A Third Of Homes Now Worth Less Than What They Cost To Build." That was incorrect. A third of home builders belonging to the National Association of Home Builders have reported instances in which new homes received appraisals of less than building costs.

Comments

[bintampa]

12:12 PM on 04/19/2012

I wouldn't believe that they are valuing the homes at less than the cost to build unless I got a chance to see their books. The most expensive cost in a home is the property. Labor and materials come next. They probably paid an outrageous price for a piece of property and tried to build a mcmansion on the property. I have seen the almost same exact house built on two different pieces of property and the price difference was almost $400,000. Anytime you build a house on spec you are taking a risk. So if you build a house on spec and you lose your ass, it's on you.

[Kenz300]

01:00 AM on 04/19/2012

Mitt Romney is helping by tearing down his ocean front home and building a new one in its place. At least that is one less home on the market.

[Kenz300]

12:51 AM on 04/19/2012

Many Homes Now Worth Less Than What They Cost To Build --- Sounds like the builders need to find a new line of work unless they want to lose money on every house they build.

They should go into fixing up some of the 10 million homes already on the market and help get them sold. Home building will not improve until the current inventory gets reduced. Building more only adds to the inventory and makes things worse.

[kamact]

10:07 PM on 04/18/2012

Thank the TBTF banksters....show them the love....

[MSROADKILL612]

09:40 PM on 04/18/2012

old news

builders should be renovating old, not building new - it makes no sense except in odd circumstances

america needs to get over new - if the roof works - the rest is details. old = good location too.

[tbrad]

06:51 PM on 04/18/2012

The problem in America is that we distorted the purpose of owning a home. It is NOT to make a return or to create a ATM. Its a place to live and raise a family. At the same time of owning a home we also develop a hard asset that will provide a foundation for a stable asset portfolio for the family.
With a very mobile society where jobs opportunities are anywhere in the world and you have a recipe for little interest in home ownership since people do not want to get burdened with trying to sell a home when a job is across the country. Combine that with a buyers market and homes losing value, then you have little demand for old or new housing. Its a buyers market and new homes are not immune. Toss in higher qualifications for loans and it creates havoc for a home builder who is pricing in a highly volatile market.

[MSROADKILL612]

09:32 PM on 04/18/2012

seems the single wide was the smart option - go Earle

[anothervoice]

06:17 PM on 04/18/2012

You're far better off with a well-designed small home. You can have better quality, better fittings, a smaller mortgage and less upkeep. Not to mention more trees; maybe even some wildlife space.

It's an inverse equation; smaller home = greater happiness.

[MSROADKILL612]

09:33 PM on 04/18/2012

or maybe a big messy home?

[anothervoice]

08:46 AM on 04/19/2012

That's the point where the home owns you.

[anothervoice]

06:01 PM on 04/18/2012

Tell that to my insurance agent.

Not a claim, not a hurricane in 20 years. Yet the premiums go up every year and the replacement value is waaaaay down.

[AnarchyOfTaste]

05:27 PM on 04/18/2012

This is the free market working, and signalling builders to stop. Unfortunately, our government is still trying to incentivize people to buy, rather than let these signals guide the economy.

[anothervoice]

06:03 PM on 04/18/2012

If the builders can't seem to stop, then bankruptcy will be their next clue.

On the upside, Zillow shows the market bottoming out and now trending up in my area.

[AnarchyOfTaste]

06:18 PM on 04/18/2012

Mine too...

Good for me, bad for new home buyers.

[tazmodious]

03:46 PM on 04/18/2012

The housing market and the comapnies that build new homes seem to be engaged in a pattern of self destruction. Sounds to me the market should shift from building new homes to updating old homes so they are more energy efficient, attractive and up to date. I don't understand why these companies aren't making this simple shift especially when so many of the homes are at foreclosure prices and building more new homes is only lowering the prices of those homes. Very strange market this is, with a lot of people in it not thinking.

[Owlwriter16]

04:12 PM on 04/18/2012

In America to buy NEW is better!

[tazmodious]

04:35 PM on 04/18/2012

Which is really weird to me because most older homes, cars, furniture, tools, appliances (most anything) are far superior in quality to newer ones. I tend to by used older American made items because I know they will last me a lifetime and are easier to repair if they do break down.

[cyclone70]

03:16 PM on 04/18/2012

Why build new when there are so many exisiting homes on the market? we already have a problem with suburban sprawl we don't need anothe "River Valley Forest" or "Cherry Hill Farms" built

I swear they have a hat full of words like tree, forest, lake, farm and pick three to name new subdivisions

one might ask where is the forest or the farm? why of course they were bulldosed to build the new development, silly!

[redraspberry]

03:00 PM on 04/18/2012

It's a dead industry. Home builders should build homes for people who want them. Not as a commodity to try and sell on the open market.

[anothervoice]

06:05 PM on 04/18/2012

Exactly. And stop with the "Margin McMansion" already. We're not tying square footage to self worth anymore.

Especially when we own zero square footage.... You listening, builders?

[JoeBlough]

02:53 PM on 04/18/2012

The end product isn't worth the list of ingredients? Wouldn’t that be the starting point in evaluating worth?

[anothervoice]

06:09 PM on 04/18/2012

Or a political candidate?

[skitzlpk]

02:06 PM on 04/18/2012

If murder was legal, appraisers would be the first on my list. The housing market is suffering from a crisis of confidence or lack of & appraisers who essentially work for the banks now could care less about the "x factor". X equals what it takes in true hard costs to build a home from the ground up plus those added amenities. These same appraisers took that x factor & added double the price during the peak & now have turned around to diminish that same product by less than actual cost. So many people are involved with industries that control that industry but they're clueless what it takes to bring a product to market. Housing was not meant to be a commodity, it was always a long term investment with gradual historical appreciation attached. That's what destroyed my industry, musical chairs of greed & 5 over zealous states who drove pricing through the roof. They screwed the entire nation & crooked appraisers helped them do it..

[EvilBookReading]

03:11 PM on 04/18/2012

I agree. I worked for an appraiser and now a mortgage company. Who are you gonna blame? Of course the salesman is going to say, "look I need it to come in at this value", but the appraisers are supposed to be completely indifferent to that. It is only now with the current laws on the books separating the two from one another that you get close to a relationship that is arms length.

[MSROADKILL612]

09:55 PM on 04/18/2012

well am not convinced u didnt play along at time, perhaps could u had to

but i feel for straight shooters who chose a career for the right reasons & then encounter reality

a mate studied 6 years & tossed being a barrister after 6 weeks w/ a accident litigation company

[Jen Celli]

01:42 PM on 04/18/2012

What kind of homes are the builders building and where is the lending for the purchase coming from? You can bet that it isn't in entry level or low end starter homes.

Part of the appraisal process is assessing the value of the land. Is the cost of the land a lower percentage of the overall price of the property or not? After all, the builder has to make improvements to raw land and although that is part of the cost of construction, if they bought that land at the top of the market or for more than they can ask for now, that's not likely to be recovered; but it does remove the asset from the books and relieves them of the liability and tax burden.

Some things have to be compromised; but you can bet that the cost to build is greatly impacted by lower wages and cost of subcontractors are down as well. The low bidder gets the subcontract. Be concerned with the new houses if they aren't in the higher end.