New Housing Construction Starts

[Jerry Stanford]

I listened to economist Diane Swonk from Chicago a bit this morning. She noted that new construction builders were not happy as they were not seeing the  margins they wanted for the demand they have been getting for new construction.  Two things come to my mind...1) If the new construction is slowing then the demand may shift to buyers looking for rehabbed homes...2) If #1 is happening then those buyers may be looking for rehabs that are at the level of a new construction which may raise the costs of rehabs.  Any thoughts on this??

[Mike Makkar]

@Jerry Stanford, I've explored new construction and its predicting current economics with future value of RE might be. Essentially, speculation. 

I've explored land development and new construction. Part of the reason why new construction is not generating the desired returns (4% to 7% if you strectch) is because of escalating construction costs. In dallas, new construction of $80 to $120 per sq. ft, makes sense only if you build on a land that you purchase for $30 to $60 a sq foot, that you can sell for $220 to $350 sqft. At those rates, its a high end home or commercial RE.

On the other hand, you can acquire a property for $60 a sqft, rehab it for $20 to $25sqft and flip it for $150 a sqft in a shorter amount of time (15% returns). Or rent for $1 a sqft per month (12% never ending returns per year) 

But, I believe the economics will reach equilibrium! Construction costs will lower; there will be less inventory forcing shift back to newer construction to make that side of the business more profitable.