One thing that’s very important in determining the underlying value of a house is the cost to replace it. Obviously, if it costs $200,000 to build a house, then no one is going to be able to build new ones planning on selling them for $150k. If you buy a house at $150k in this scenario, you know that even if builders are on the sideline now, when they ultimately return to building the houses will cost at least $200k.
It turns out that it’s much much more expensive to build a house than it was even 20 years ago, even after adjusting for inflation. The reason has to do with the continuing addition to the minimum building requirements.
Nothing could more clearly show the impact of this than the following, taken from an email sent out last week by the National Association of Homebuilders:
Fire sprinkler mandates will be part of the 2009 International Residential Code and will be required in all one- and two-family homes and townhouses that build to the code as of Jan. 1, 2011.
The sudden — and controversial — arrival on Saturday of 900 fire officials eligible to vote at the International Code Council‘s final action hearings in Minneapolis swelled the number of sprinkler proponents and the measure was approved by a vote of 1,283 to 470 on Sunday morning.
The email that was sent suggests a cost of $1.50 per square foot for sprinkler gear. But it leaves out the significant cost of labor and design (you have to design each sprinkler installation separately with costly consultants and get it signed off by the fire department).
Based on my experience paying for sprinkler systems, this change has just added a minimum of $4,000 to the cost of typical 2-br homes.
Actually, since I’m a condominium developer, this helps even the playing field. I already have to put sprinklers in all my units. Things like this have given a secret cost advantage to my single-family-residential building competitors.
Anyways, getting back to Las Vegas: there’s no evidence that there will be any letup in the slow but steady addition of new requirements to building codes (especially because a lot of the people voting for the changes benefit professionally from the increased code requirements). That means houses will continue to get costlier and costlier to build, albeit safer. Prices may be down in 2008, but logic makes it clear that they can’t stay down.