I wish I would have dated this letter. Im thinking I wrote this to a radio show host a few years after the real estate market collapse, 2010-2011. Hey guys, Great interview with Mr. Towry. It was very interesting to find out how many regulations (new and old) there are in building a home. For example, the fact that builders are required to put fire extinguisher sprinklers in new homes is beyond belief and stupid. Fire insurance is low for a reason, because the probability of your home burning is close to zero. In a building boom those same regulations are a form of barriers to entry and may be welcomed by builders to discourage competitors. In a real estate depression, they may kill the remaining market. As I stated in your radio program, buyers must be aware, right? In the peak of the real estate market, I went to my uncle, who is a general contractor, and we estimated the cost of building a 1500 sq ft home including labor and materials. We came up with a number of less than 100K. Land was the only unknown, which fluctuates widely. Land price before the boom was $5,000 an acre in Bakersfield. Mr. Towry quoted a price of $120,000 a lot. (I was a bit confused as to whether that was the price he paid KB for each lot at the Copper Leaf development or whether that was the price land developers paid on average at the peak of the market.) In either case, the builders’ margins at the peak were ridiculously high because those 1500 sq ft homes were going for near 300K or more. However, I liked Mr. Towrys response--that many risks are involved when creating an empire--that businessmen deserve all the profits they can gain. The opposite should also be true--greed distorts markets and he wasnt crying when he was selling his homes for what the market would bare. I guess, he was the wrong person to ask whether consumers should be more empowered. ( I asked him that-- consumers of homes should be afforded the same rights as consumers of automobiles. In the car business by law the dealership has to disclose their pink sheets. The cost they incurred when purchasing the car from the car manufacturer. This indicates their margin. Conversely, in the housing market, builders margins are never disclosed and the consumer is left without knowing the true value of the home.) But I wanted to let your listeners know that they must make better decisions--many times consumers are on their own. People must know that they cant go too wrong if they buy property at close to what it would cost to rebuild it. Any price paid above that is pure speculation and can be very dangerous. They should also keep in mind that the only driver of price in real estate is rent and income. Actually, rent is driven primarily by peoples income, so even the rent number can go down. So in reality, reduced by all other perceived,needed variables, real estate is dictated by income. It has been stated in many financial books including Ric Edelmans, The Truth About Money and his various other books and also, by John Train, a reputable financial author, that people should not mortgage out more than twice their annual income. This rule to my surprise is further supported by even the humble finance professors at Cal-State. Since, the median family income in Bakersfield is a mere $45K. People should be looking at mortgages that is on average of $90k, taking into account the lack on a sizable down payment. The historical low 30 year interest rate may distort this rule of thumb, but I think it is still a prudent rule. Homes may have to ratchet down to these levels to make them truly affordable.
Posted on: Fri, 07 Mar 2014 13:07:13 +0000
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