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Over the past 12 months lumber futures have traded between about 450 and 1700. Currently it's at about 950. Looking at the 25-year chart, pre-pandemic lumber traded between about 150 and 600, and it's hardly a straight line up and to the right.
In most expansions the housing stock gets overbuilt, at least regionally. Whenever this one ends, I expect lumber will be much lower than today's quote.
Lumber is just a fraction of the materials used in a home, and inflation is across the board for everything and is highly unlikely it will come back close to pre pandemic levels. Theres concrete, copper, drywall, etc that all go into the cost of a home. Not to mention the labor shortage.
Lumber is just a fraction of the materials used in a home, and inflation is across the board for everything and is highly unlikely it will come back close to pre pandemic levels. Theres concrete, copper, drywall, etc that all go into the cost of a home. Not to mention the labor shortage.
I just gave lumber as one example. Find a chart of any building material and I expect you'll see big peaks and troughs in pricing. Just for grins I did a web search on gypsum (drywall) prices...
Also, during times when there's a glut of homes on the market the cost of construction is not that significant. If building a house costs $1M but there are many comparable existing homes available at $700k, few will choose to build.
I just gave lumber as one example. Find a chart of any building material and I expect you'll see big peaks and troughs in pricing. Just for grins I did a web search on gypsum (drywall) prices...
Also, during times when there's a glut of homes on the market the cost of construction is not that significant. If building a house costs $1M but there are many comparable existing homes available at $700k, few will choose to build.
I think you hit the nail on the head. It may be a lot cheaper to just buy an already built house and update it a bit than to build a new house and have the uncertain costs, the hassle of landscaping, and waiting to move in. Also, with baby boomers aging and not wanting the work of homeownership and opting to move to condos, apartments, and other living arrangements, there may be a glut of homes for sale in the future.
Personally, I would entertain the idea of owning a condo as long as a garage separated the neighboring condo. Otherwise, I consider condos glorified apartments and do not want to hear another tenant above, below, or next to me.
Ideally, I would like to build a 1500 square foot home with an unfinished basement. Two beds two baths and 2 or 3 car garage. I'm not sure that is feasible now with building costs.
I've always just bought a house when I needed one. I rented until I was 29, and then have been a homeowner ever since. Thankfully I've always been able to live in cities with moderate housing costs.
I'd not make a major financial decision such as buying (or not) a house, based on personal needs. Financial considerations come first. If the market favors buying, I'll buy. If the market favors selling, I'll sell, and rent. The overarching aim isn't my convenience or quality of life, but maximising profits (or minimizing losses), of course within the confines of my capacity to observe, understand and act. This means often making a mistake or sustaining a lapse in judgment. But the intention at least is noble, if by "noble" we mean strictly financial considerations.
Currently in a very high-COL area, I have much affinity for the city and the locale, but deep revulsion towards its tax structure and regulatory environment. This melding of good and bad, results in much contrary tugging, as to whether to live here for the rest of my life, to leave immediately, or anything in between. To buy or not to buy, is a subset of these considerations.
It is unfortunately the case, that it is precisely those markets which have high carrying costs (property taxes, insurance, market-price for home improvement services,...), where houses tend to appreciate the most. In other words, the profit from a sprightly rising market, is purchased at the cost of high recurring expenses. Property tax may be low in rural South Dakota, and insurance too, but then, appreciation of housing-prices will also be low. So a house as an investment, is a dicey thing... the gains can be large indeed, but along the way, so are the costs. Is it ultimately worth it? Hard to say!
It is unfortunately the case, that it is precisely those markets which have high carrying costs (property taxes, insurance, market-price for home improvement services,...), where houses tend to appreciate the most. In other words, the profit from a sprightly rising market, is purchased at the cost of high recurring expenses. Property tax may be low in rural South Dakota, and insurance too, but then, appreciation of housing-prices will also be low. So a house as an investment, is a dicey thing... the gains can be large indeed, but along the way, so are the costs. Is it ultimately worth it? Hard to say!
I agree with the "hard to say" part. The rent vs. buy analysis involves more unknowns than any other financial tradeoff I can think of. One needs to make assumptions about (1) future rents, (2) future home prices, (3) future investment returns, and (4) how long one will own a house if they buy.
My own experience is at odds with your assertion that real estate in lower-cost locations is a bad investment. The first home I purchased, when I was single, was a little over 2x my income. Quite reasonable by any standard. That home appreciated about 50% during the six years I owned it, and today the Redfin estimate is more than 5x what I paid in 1992. Also, the house that my wife and I purchased in 2012, right at 2x our combined income, is currently worth about 2.5x what we paid.
Thankfully I've never faced the prospect of having to pay 5x my income or more for a home. This has been largely by my own choice, as I could have gotten a job in one of the high-cost California cities if I'd wanted to.
Location: Formerly Pleasanton Ca, now in Marietta Ga
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Originally Posted by hikernut
I agree with the "hard to say" part. The rent vs. buy analysis involves more unknowns than any other financial tradeoff I can think of. One needs to make assumptions about (1) future rents, (2) future home prices, (3) future investment returns, and (4) how long one will own a house if they buy.
My own experience is at odds with your assertion that real estate in lower-cost locations is a bad investment. The first home I purchased, when I was single, was a little over 2x my income. Quite reasonable by any standard. That home appreciated about 50% during the six years I owned it, and today the Redfin estimate is more than 5x what I paid in 1992. Also, the house that my wife and I purchased in 2012, right at 2x our combined income, is currently worth about 2.5x what we paid.
Thankfully I've never faced the prospect of having to pay 5x my income or more for a home. This has been largely by my own choice, as I could have gotten a job in one of the high-cost California cities if I'd wanted to.
I agree that a home in lower cost area is a not always abad investment. I sold a home in California in a very desirable area and it went up about 60%. Pretty good gain. But my homes in the midwest over the same time period went up 120% to 220%. That's over double the return. Those homes are in what I regard as a C+ hood very blue collar. The California home was in an A class area.
When you look at the core things across the country that are 100% made in America...Food, Healthcare, Construction, Education....you start to see the dichotomy that has kept our inflation rate benign. Unchecked inflation of dollars met only by ever more cheaper imports.
Except now the overseas supply chain is creaking.
Housing prices aren't too high. Dollars are. We'll see what the Fed does this time around, but we could have 5-7% interest rates in the not too distant future. This will kill some zombie companies....and sadder still, it will likely take down a few companies that wouldn't be zombies but started wasting cash because it was so cheap to get on the debt markets.
Then the bubble moves to wages. If wages in your area are impacted, then we'll see it finally turn over into real estate. You should be able to see this coming from a mile away if it does happen.
I'm continuing to buy investment real estate based on the numbers. As a longer-term buy-and-hold investor who has been cash-flow positive on every single deal that I have purchased, there is no reason for me to stop at this time. Will there be a crash in the future? Yes very likely. However, those of us who buy and plan for that eventuality should be okay. Right now, I am focused on the following:
1. Buying and renovating properties so that I can get better tenants with solid incomes in those units.
2. Building an emergency PITI (Principal, Interest Taxes, and Insurance) fund for 6 months of expenses for each investment property.
3. Only agreeing to month-to-month leases with 30 or 60-day notices because I definitely see the government putting up eviction moratoriums again if there is a crash. While month-to-month vs. fixed-term won't protect me on that front, it'll at least give the flexibility to give notice to tenants as the crash unfolds.
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