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Rising costs cause pricing pinch for Treasure Valley home builders

Chad Olsen, owner of Envision 360 Homes, expected to spend 2015 filling the Kingston Point subdivision in Meridian with brand-new two-story homes.

From several floor plan options, Olsen thought buyers would gobble up the 2,400-square-foot design with a third bedroom upstairs and a walk-in attic. He was surprised when potential buyers toured the pair of model homes and asked him to cut off the second floor. It was too much house, they said. They’d rather trade the extra 600 square feet to cut the price from $299,000 to $270,000.

Olsen’s crews are building two of the modified single-story homes. He hopes to build 20 more homes in the subdivision this year, and that many of those are the two-story models. He’s not optimistic.

“The upstairs was the bonus-room stuff, and it killed me to lose it,” Olsen says. “That was going to be really good profit.”

Before the housing bubble, buyers wanted more square footage for their dollar, Olsen says. Today’s buyers still want the stone, the hardwood floors, the stainless-steel appliances and other high-end touches found in Envision 360 homes. But they don’t want extra yard space to mow or square footage to vacuum, and they want to stay south of $300,000.

“Traditionally, having extra square footage has been good,” Olsen says. “I find it interesting that people are going away from the two-stories, because there’s so much extra room for not many more dollars.”

A SPLIT MARKET

Recovering real estate values have buoyed both the new-construction and existing-home markets since the recession, according to the Intermountain Multiple Listing Service. But rising construction and land costs have accelerated the price climb for brand-new homes.

The median selling price of existing homes, excluding distressed sales, increased 21.6 percent from the low-water mark in 2011 to the 2015 median of $202,500. Meanwhile, new-home sales fell 10.2 percent in Ada County in 2014 compared with 2013 as more buyers took advantage of existing homes selling for a median price a full third less.

Mike Turner, owner of Front Street Brokers in Boise, says many new homes have become too expensive for most Ada County buyers. Builders have been slow to adjust to the fact that about 70 percent of all home sales are for less than $300,000, he says.

“That’s the bulk of the region,” Turner says. “(Prices) pushed way out of that, so new construction sales dipped.”

Developer Dave Yorgason says he developed more than 2,000 lots in the Treasure Valley as the longtime vice president of operations at Capital Development. He left his father’s company to found the development consulting firm Tall Timber Consulting in Boise three years ago.

Since prices hit bottom in 2011, new construction increased until January and February. Builders facing rising costs would rather have too few listings than risk paying the interest resulting from carrying too many, Yorgason says. Fewer builders are building homes without buyers already lined up.

“Builders don’t want to get hurt again,” he says. “They’ll wait for inventory levels to drop before they put more houses on the market. There’s a little bit of a herd mentality.”

RISING COSTS

Builders struggle to price new homes for less than $300,000 because of skyrocketing costs for labor, land and materials, Olsen says.

During the recession, subcontractor crews would show up at his construction sites looking for work. With many tradesmen leaving the industry or moving to hotter housing markets in Utah and elsewhere, subcontractors are now in demand and demanding higher pay.

Subcontractors have also lost patience for unprepared job sites, which cause delays, Olsen says. He often sends site photos to subcontractors to show that they can immediately get to work.

“We walk on eggshells making sure the job is ready,” he says. “I have my arms open to subs, saying, ‘You can come here, make a lot of money and leave.’ ”

One of Olsen’s two crews building in the Kingston Point subdivision are full-time employees of Envision 360 Homes, which isn’t his preference.

“Who wants to deal with employees?” he says. “The minute I become an employer, I become responsible for the whole gamut of insurance and worker’s comp.”

EXPENSIVE DIRT

During the downturn, developers were selling Ada County lots at cost — averaging about $35,000 — and at times much less, Yorgason says. CBH Homes, which builds more homes than any other Valley builder, bought and stockpiled lots for as little as little as $10,000 apiece, Yorgason says.

Lot prices in Canyon County haven’t bounced back, but in Ada County, land prices have climbed to about 70 percent of their value at the bubble’s peak, Yorgason says. Builders often pay more than $50,000 per lot, contributing to the growing chasm between new and existing homes.

“You can’t just charge another $5,000 for your house and get away with it,” Yorgason says. “We’re seeing some price resistance in new construction today.”

Olsen paid $12,000 per lot to Meridian in building and impact fees for work in another subdivision, up from about $3,000 per lot during the recession, he says.

The cost of building materials has increased 18 percent to 20 percent in the last year, Yorgason says, further feeding the cost of new homes.

“The move-up buyer can’t afford the greater gap (between new and existing homes),” he says. “They’d rather remodel their house, or buy a home and remodel it.”

IT’S GOOD TO BE BIG

Yorgason says four other big builders joined CBH Homes in buying up most of the available lots in recent years: Hubble Homes, Boise Hunter Homes, Coleman Homes and Brighton Homes. Those purchases squeezed out smaller builders, he says.

“Pre-bubble, there were always lots a builder could find to buy,” Yorgason says. “There’s still not a lot of lots. By consequence, some builders don’t have many options.”

CBH Homes controls a lot inventory that will satisfy its land needs for between two and five years, CBH Vice President Ronda Conger says. The builder has “learned a few things about the market” over the last 20 years, Conger says.

“We were fortunate to purchase land when the prices were right for us,” she says. “This inventory has allowed us to keep prices low and stay afloat during the economic comeback.”

Many developers are still having a hard time securing financing for projects, limiting the number of lots coming online, Yorgason says. Small builders seeking to work in others’ developments are in the same boat, especially those wanting to buy a small number of lots, Olsen says.

“Guys call us asking to buy lots all the time,” he says. “I tell them, ‘Sorry.’ ”

Developers expecting lot values to increase are now building homes themselves rather than selling the lots to builders, Olsen says.

“I’ve noticed developers say, ‘We don’t want to sell to you and have the land appreciate. We want to make money on that.’ It’s like when you see birds, and then they all fly one way, and then they all fly another.”

The large builders are content to sit on their empty lots and hope they gain value rather than risk overbuilding and driving down prices, he says.

“One reason land prices have pulled back a little bit is the big production builders do not need more inventory,” Yorgason says. “They aren’t actively buying land. They have several years of inventory to work with.”

CONSTRUCTION OUTLOOK: MIXED?

But Turner, the real estate broker, thinks builders will stay busy this year.

Several indicators suggest the two-month decline in new-construction inventory will be a blip rather than the start of a prolonged trend, he says.

Sales have been rising earlier in the year than usual, perhaps due to the mild winter and early spring, he says. Around the holidays, sellers living in their listed homes often pull their houses off the market, wait out the traditional winter slow stretch and relist their homes once the grass turns green.

Vacant homes in the new-construction inventory never delist. When buyers pushed demand higher than usual for January and February, the lack of existing homes pushed them toward new houses, Turner says. The results were the highest January and February new-construction sales since 2007.

“For whatever reason this year, (buyers) started super early,” Turner says. “All of that new construction was gobbled up. I don’t know how long that trend will continue.”

In February, Ada County had about seven months worth of new construction inventory, slightly more than the six-month supply real estate pros says is ideal. February is the traditional high-water mark for inventory, Yorgason says. He expects new-construction sales to outpace new-home listings, bringing inventory down. Yet the double-digit, year-over-year median price increases for new homes will become a thing of the past — and that’s a good thing, he says.

“That’s what builders want to see: 5 percent price increases,” Yorgason says. “If we get overpriced, people can’t afford them.”

Olsen says he will continue to take a cautious approach, but other builders — including some burned after overbuilding before the downturn — are returning to the spec home game. New construction is addictive, Olsen says: After completing a successful subdivision, it’s easy to think you can bite off a bigger hunk with your next project.

“When do you finally put your hands in your pockets and walk out of the casino?” he says. “How much do you have to make? Or how much do you have to lose?”

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