Archive for March 2015
Last month I made the comment that the housing cycle can cause the Green Movement to go backwards. I then went on to explain what the housing cycle is, what causes it, and why it probably won’t ever go away. Now I can expand a little further on what I meant by the original statement.
At the start of the housing cycle, let’s call it stage 1, where supply far exceeds demand from the overbuilding at the end of the previous cycle, prices and costs are both at lows. Too many homes for sale leads to lower prices and no building going on leads to lower costs. Builders can’t sell homes, builders aren’t building homes, and labor and materials lower their prices in an attempt to get any work possible.
As we move through the cycle to stage 2 where the inventory of homes starts to sell at the lower prices thereby reducing inventory, supply starts to move back towards equilibrium. Builders are still starting few homes so costs remain low. As supply further shrinks, prices start to rise as demand catches up with supply, but new construction is still muted therefore costs remain low. This part of the cycle is the favorite for builders. Prices are rising but costs remain low. In the current cycle this is where builders started to really embrace the Green Movement. But being Green adds costs. But it’s also popular with buyers and city governments to be Green. With rising prices, the additional costs can be covered and therefore justified.
As we move further through the cycle to stage 3, leftover inventory is basically gone and builders are building at a rapid pace again. This is when costs start to go up. Labor and material costs increase as demand for them starts to run ahead of supply. Now we’re experiencing rising prices AND rising costs. Being Green has now become a part of the building process as more and more builders embrace it especially as their competition adopts it. The marketing bang for the buck and the City government approval bang for the buck make being Green worth it as builders are able to cover these increased costs with increasing prices.
But now we get to stage 4. Here the supply of new homes is running ahead of demand for new homes. Builders are building too many homes but from a macro level it’s not only hard to know it, it’s even harder to convince builders to stop building. It’s against everything we stand for. As supply starts too further outpace demand prices stop rising. Yet costs continue to increase as the demand for labor and materials runs far ahead of supply. It’s a classic profit squeeze. Builders now panic trying to figure out how to make more money when prices are not rising yet costs are. Many decide that removing things from the home to lower costs is the answer. If labor prices won’t go down, and materials are a choice, many choose to either buy less expensive materials or simply remove materials from the home.
Now I get back to my original statement and I’ll use solar as an example. Back in stage 2, I decided to include solar in my homes to be Green and attract buyers. Solar is basically a material choice. It’s not necessary because a home can still hook up to the grid and function perfectly. Solar is a choice it’s not a must. Roofing is a must, drywall is a must, concrete is a must. These are not choices and therefore cannot be considered as possible eliminations. Let’s say solar costs $10,000 per house. If its removed and the builder goes back to just hooking up to the grid, he saves $10,000. It’s that simple. He doesn’t want to, but stage 4 of the housing cycle almost forces him to go backwards in his Green Movement. It gets even worse as stage 4 gets to the end and we’re back to stage 1. Now prices are DROPPING yet believe it or not costs are still rising. This is the beginning of the end of the cycle and many builders are stripping whatever they can from their homes to stay profitable. And the first and easiest things to eliminate are what I call the choices. Almost all Green components of a home are a choice. The “musts” can’t be touched but the choices can go. This is what I meant by the housing cycle can cause the Green Movement to go backwards.
City Ventures has not let go of its commitment to Green and have not removed anything we have added as a Green choice. Nor do we plan on doing so.
Nothing wrong with a little propaganda for doing the right thing.
Until next time,