New home construction has taken more than its fair share of this great recession. For many in the profession including the author of this article the recession began in late 2006. Home prices were high, in fact they were higher than we had ever seen. Profits were approaching the 20% mark when 15% had been standard for many years and then as things started to change, houses began to take longer to sell. A market that had once been a two to four month market quickly became a six to ten month market and then a two year market. Spec homes had flooded the market. It was not the custom builders that had caused the majority of the problem, although they had contributed their fair share. It was the tract builders that had historically taken part in contract jobs, building a house only if it was sold before construction that really contributed to the deluge. These heavy wallet businesses saw an opportunity in the spec home market and they took it. It was not unusual to see seven or eight brand new homes for sale on the same street. The consumer saw the same homes for sale for months and months and then as things began to slow, the they got scared. They began asking themselves why there were so many homes for sale. They began to question prices asking "If it doesn't sale isn't the price too high."
To compound the problem of high home prices, slow sales and plummeting consumer confidence was the fact that material prices had followed home prices right to the top. We are now five years into this great recession and quite honestly the recovery is yet a dim light on the far horizon. The reason for this is two-fold. Our economy no longer works under the strict tenets of capitalism because companies that get in trouble are either bailed out by the government or they file for bankruptcy and then open up again under a new name. In essence why would a business slash prices to stay in business when they could just wipe out all existing debt and start again. This leaves the home builder and consumer left holding the final bucket which is far too heavy to hold. The homeowner that doesn't already own a house cannot buy one without some sort of incentive because most houses cost more than they are valued. The analogy is this if a person on the street was approached and told that they could purchase a pencil for $2 but that they could only sell it for $1.50 why would they buy it?
Despite this a few people are still buying a few houses which causes the recession to become extended. Most are purchased as a result of government incentives or drastically reduced builder profits from the big tract builders that have cut margins just to stay in business. The small amount of custom construction that is going on right now is in areas where the recession is less intense due to population influx or is the result of buyers that have enough money that they don't care about short term value. This said lets get back to our original question; should a person build a house in this market. Unfortunately the answer is NO. Material prices will never digress if consumers continue to give in to high prices and if a person does build a house in this market there is no telling where their home value will be in two years. From a builders standpoint the house market is a "Hold" right now. If you own a house hold on to it because you will take a beating if you try to sell. If you are considering building a house wait. The amount that it takes to build a house today is very close to what the house will be worth upon completion. In essence their is no equity built into a new home right now.
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