THE SQUARE FOOT PRICING MYSTERY
How I learned to stop worrying and love the infamous square foot pricing question.
Ask any farmer what a bushel of wheat costs and he’ll have an instant answer for you. Similarly, the price of a barrel of oil and an ounce of gold are common knowledge, with costs quoted down to the last cent. But try asking a home builder about the “cost per square foot” to build a home, and you’ll likely get any number of responses, including lowball guesses, unhelpfully vague price ranges, or even outright irritation from the respondent. Why is new home construction so different? A simple question like this seems fair, so why is it met with disdain by home builders?
The disconnect stems from the fact that in residential construction, there is simply no agreed upon standard for what constitutes a square foot. No grocer would have trouble telling you what a gallon of milk costs, and what it contains. It is not so easy, however, to decide what is contained in a square foot of home. For example, do builders only include finished square footage in their estimates? Do they count unfinished basements? Does a square foot include the garage and deck? Therein lies the complication: it’s up to each builder to decide for themselves.
For illustration, consider the hypothetical Jones Residence. The Jones family wants a rancher with 2,000 square feet on the main level, an unfinished basement, a three-car garage (700 square feet), and a covered deck (200 square feet). Simple enough, right? The savvy Mr. Jones, seeking more than one opinion, meets with two separate builders and asks them, independently, what they would charge him, per square foot to build his dream home.
Builder A looks at the project and considers it a 4,000-square-foot home since, after all, while the basement will be unfinished, it is nonetheless conditioned space and thereby “countable”. He also reasons that all of his homes generally have a 200-square-foot covered deck with a three-car garage, an integral part of the house. His price? Only $100/square foot.
Builder B looks at this very same layout, but considers it a 3,417-square-foot home, after using “tried and true” math: He counts the main level area (2,000 square feet) at full value; the basement and garage at half value (1,000 square feet and 350 square feet); and the covered deck at one-third value (67 square feet). He proudly presents his reasonable cost to build the Jones Residence: $117/square foot.
That’s a difference of $17/foot between the two, and their calculations are 583 square feet apart…and they’re both right. Notice, despite the disparities mentioned above, they’ve both quoted a home that costs about $400,000. Builder B just looks more expensive, on paper.
This scenario plays out in real life all the time. Unfortunately, it often results in a homeowner selecting a builder based on who can provide the “lowest cost per foot” without taking into account the bigger picture. Each builder, when presented with plans and specifications, is able to implement unit costing and vendor quotes to arrive at a total construction cost. At the end the day, the square-foot cost is largely incidental – a house costs what it costs.
All too often, however, folks who come into my office will attempt to pit me against another builder by stating, “Builder X says she can build for $110/ square foot, what’s your square foot cost?” Before I answer, I’ll whisper a silent prayer: “Lord, forgive them; they know not what they ask…”
I then dive into my highly conditional response, which goes like this:
First, we’ll make the following assumptions:
1. Tap fees and/or well and septic costs are excluded (for now);
2. The house will have a three-car garage and 200-square-foot covered deck;
3. Site conditions are favorable (i.e. there are no expansive soils, and no blasting is needed);
4. The house will be fully finished (minus 5% of area for mechanical room);
5. The driveway and utility lengths are 100 feet or less;
6. We’re using standard construction systems and methodology (i.e. 2×6 exterior walls, composition shingle roof, forced air, vinyl windows, 50/40/10 split of carpet, hardwood and tile floors, granite counter tops, gas fireplace, etc.);
7. Landscaping is excluded.
After rattling these off, I catch my breath… then continue. Then the magic happens: once we’ve defined what is and what isn’t included, the square-foot pricing conversation actually begins to make sense. There we sit – builder and prospective client – having a productive conversation about what the house costs.
Suddenly, I am able to show Mr. Jones that his initial plan of just multiplying $100/foot times 2,000 finished square feet on the main level isn’t going to give him an accurate understanding of cost. He will learn that no math, used by any builder, will net him a $200,000 home. (How many times have you had this conversation?) Most importantly, he will learn why. This helpful conversation allows me to show my attention to detail and instills a level of confidence on the part of the client. To think: If I had just stated a ballpark “cost per foot” without qualifications, I wouldn’t have earned the opportunity to get into these details, especially if my ballpark square foot cost was higher than “the other guy’s.”
The lesson here is that it’s incumbent upon the builder to meet the prospective client where they are. The question of cost per square foot, despite our wishes, may never go away, and that is because perfectly reasonable folks will continue to seek a way to traverse a sea of information, advertising, and sales propositions, and find a simple, quantifiable unit of measurement. That’s fair enough.
My suggestion to those in the building industry: When you’re asked what your square foot cost is, answer the question with a question. This isn’t being evasive; it’s being honest. These days, I find myself saying, “Well, that depends: What do you mean by square foot?” and that’s a great conversation starter.
It does take time to explain the rules, and to clearly delineate what is and isn’t included, to be sure. But this technique accomplishes two key objectives: First, the prospective client is able to determine how far she can expect her dollars to go, and second, the builder is able to qualify the prospective client so neither party wastes their time unnecessarily. Once the square footage discussion has been had, both the builder and prospective client can focus on the viability of the project and the possibility of working together.
I used to dread the square foot question. But now, when Mr. Jones asks me, “What is your cost per square foot?” I’ll try to put him at ease by validating his concern, knowing that we have to start somewhere. But the question behind the question is really “how much will my house cost?” and this is far easier to answer, and results in a happier builder, as well as a happier client.
Andy Stauffer is president of Stauffer & Sons Construction based in Colorado Springs.
FIVE HOUSING TRENDS SHAPING 2017 WINDOW DESIGN
These consumer trends will impact this year’s most in-demand window products.
As consumers continue to rank home characteristics such as seamless indoor-outdoor living and home automation as their top in-demand home features, builders should be on alert and choose products that cater to these trends, which insert themselves into every aspect of the home from floor plans to finish details. One important product to consider is windows.
Once viewed by homeowners almost as an afterthought, windows have evolved into a feature that shapes a significant portion of a home’s design, building envelope, and overall experience. Here are five trends that impact the type of window products consumers are looking for in their homes:
Transitional Living
More commonly known as the indoor/outdoor living trend where interior and exterior spaces flow together seamlessly, transitional living is redefining home design. The trend has consistently dominated design demand for consumers who want open floor plans and outdoor entertainment space. Earlier this year, the AIA logged a 61% increase in firms reporting their clients wanted blended indoor-outdoor living. The blending of the natural environment with the home has spurred the development of sliding glass walls and folding doors, such as the new Weiland sliding doors from Andersen, folding glass door systems from NanaWall, and the expansive bi-fold door from Marvin Windows and Doors to name a few.
“The trends really bookend two very different demographics,” says Sal Abbate, senior vice president and chief sales and marketing officer at Andersen Windows, stating both millennial and baby boomer home buyers crave indoor-outdoor connections. “It isn’t just folks building a multi-million dollar homes that are aspiring to that kind of look, it’s also the first-or-second-time home buyer that’s trying to incorporate that indoor-outdoor flow into their overall architectural plan.”
Home Automation, Aging in Place, and Energy Efficiency
When it comes to windows, Abbate says these three trends go hand-in-hand. The ever-increasing smart home technology sphere has weaved its way into window design, offering ease of use, increased security, and energy monitoring.
Home automation can make operating large and often heavy, difficult-to-move sliding doors effortless when incorporated into the whole system.
“The smart home really does two things, it helps the older generations open and close their doors for easier operation, and on the millennial side it’s gives them that lifestyle of everything digital,” says Abbate.
For example, the automated multi-Slide Patio door from Weather Shield (shown here) can be controlled by a discreet push-button panel on the wall or connected to most smart-home systems through a smartphone app. Sensors prevent the door from closing on a person, animal, or object, and the system has a battery backup to power a limited number of operations in case of a power outage.
“There are plenty of products out there that have been around for a while but they can be big, noisy, and obtrusive,” says Abbate. “Making automation seamless with the operation of the door and the environment around you, and then building that into some Internet of Things interface is going to be a really big trend.”
Beyond aging in place, technology can help increase a home’s energy efficiency and security when equipped with monitoring systems. Andersen’s VeriLock system of sensors tell homeowners if windows are open or closed, and locked or unlocked. Unlocked windows are less energy efficient than locked ones, which create a more secure building envelope for the home. After being alerted, homeowners are then able to either manually lock their windows or remotely lock them through the wireless system.
“If you can have products like VeriLock that really speak back to the overall building envelope, you’re just going to be more energy efficient,” says Abbate. “If fenestration products can start talking back to consumers about their energy trends and can tie home automation to energy efficiency, I think there’s going to be a continual trend of homeowners interested in that.”
Contemporary Design
After conducting market research among consumers, architects, and design professionals, Abbate and his colleagues at Andersen found a preference for a contemporary aesthetic, which isn’t to be confused with modern design.
“It’s not so much about material type, and we surprisingly found that it wasn’t the pure glass box or aluminum material that makes [people] think about contemporary design,” says Abbate. “It’s more about a sort of harmony with the outside, so clean sight lines, thin profiles, warm dark colors, and anything that blends in with the environment. It’s about making [the home] feel a little cleaner, more simplistic, and more minimalist.”
Dark finishes have grown in popularity for kitchen and bath hardware and appliances, but have been slow to emerge in window design until now. In keeping with the contemporary trend for warm colors that are reminiscent of the environment, Andersen recently launched two new dark interior colors, Black on Black and Dark Bronze, and earlier this year Marvin announced the introduction of dark exterior window cladding finishes in suede (shown here), gunmetal, clay, and bronze.
About the Author
Lauren is the Products Editor for Hanley Wood’s residential construction group. She holds two bachelor’s degrees in English Writing and Communications from Clemson University.
JUMP IN 1ST-TIME BUYERS SEEN FOR 2017
Realtor.com survey: 52% of buyers likely to be searching for their first house.
The 2017 home buying season will be characterized by a large increase in first time home buyers, increasing affordability issues among buyers, and high demand for suburban homes, according to realtor.com®’s Active Home Shopper Report released Wednesday.
The study was based on September survey data of active shoppers on realtor.com® that analyzed responses from consumers who plan to purchase homes in the Spring or Summer of 2017.
Significant findings from the survey include a potentially large increase in first time home buyers in 2017, capable of rising to 52% of all buyers next year, from 33% in 2016.
Affordability, down payments, and credit scores are starting to challenge limited inventory as the No. 1 barrier to home ownership.
Suburban homes are the most preferred as 43% of first time home buyers have a stated preference for the suburbs, likely due to their desire for safe neighborhoods, privacy and to meet the needs of their growing families.
Highlights:
1. First time home buyers could make up more than half of the 2017 home buyer population.
The most notable characteristic of the 2017 home buying season is expected to be the large number of first time home buyers entering the market. According to the survey, first time home buyers now make up 52% of prospective buyers looking to purchase in 2017. Last year, 33%of shoppers planning to purchase in 2016 were first timers.
Millennials are leading the pack with 61% of these first-time home buyers under age 35. Top reasons cited by millennials for buying include getting married or moving in with a partner, growing tired of their current living space, and planning to increase family size.
“This represents an ‘oh shift’ moment in housing,” said Jonathan Smoke, chief economist for realtor.com®. “With so many first time buyers in the market, competition will be even fiercer next year for affordable starter homes in the suburbs. Those looking to buy may want to consider a winter home purchase in order to avoid bidding wars and higher prices spurred by a potential increase in millennial buyers.”
2. Affordability and mortgage qualification are expected to replace lack of inventory as the largest barrier to home ownership.
In 2016, 40 %of home shoppers cited lack of inventory as the largest barrier to home ownership, but realtor.com® reports this will potentially shift to affordability and mortgage qualification issues as more first time home buyers enter the market. Of first time home buyers planning to purchase next spring surveyed in September, 37% indicated their largest impediment to home ownership is the down payment and 30% cited finding a house within their budget.
3. Safe neighborhoods, more living space, and larger yards top list of key home attributes.
First-time home buyers cite safety, more living space, and larger yards as the key features for their new homes. This is consistent with their top goals of buying: attaining privacy and addressing the needs of their families. A third top objective of first time buyers is to make a financial investment that will grow over time.
As millennials marry and move in with partners, reasons to purchase are driven by actual or planned growth in their families, and they show strong preference for single family homes (39%) or townhomes (34%) and away from multi-family homes (15%), condos (10%), or mobile homes (2%).
4. Competition for the suburbs is expected to heat up.
With families and safety on the brain, it’s no surprise that first time home buyers identified the suburbs as their No. 1 preferred location. In fact, 50% of all respondents identified suburban areas as their preferred location. For boomers, the desire for the suburbs can likely be attributed to their desire to be close to family and friends.
Data also show younger home buyers are more likely than their older counterparts to prefer urban living, the second-most common location preference among millennials after suburbs.
5. Spring and summer will continue to be the hottest times to buy a house in 2017.
A majority of all survey respondents were beginning the housing search at the time of the survey and planned to purchase in seven months or longer, indicating spring and summer will continue as the top seasons to buy and sell homes. Realtor.com® found that 73% of respondents had been considering home ownership for less than three months and did not expect to purchase a home immediately.
2017 OUTLOOKS FOR HOUSING AND REMODELING
Young adults’ ‘wait-and-then-hurry-up” stage of household formation, family formation, and housing preference behavior is revving up.
Next year won’t be housing’s emancipating rebound we may have hoped for, but it’s also more than likely not going to be a stretch we’ll have reason to fear. For glass-half-empty types, 2017 housing measures will likely continue to underperform historical norm trends based on real demand plus pent-up demand. For the glass-half-full set, that solid and growing base of demand–and the big challenges to meet it–remain in the category of a champagne problem.
Of course, a big, honking unknown and possibly menacing variable is what the Federal Reserve does to rates for borrowed money, and how that flows through to mortgage interest rates. A positive-side plausible unknown is what could happen with household wage growth, particularly among younger adult households who need to shed college debt and get their noses above water to fully activate as a universe of housing demand. We’ll come back to this point below.
Otherwise, fundamentals will plod along, opportunity will concentrate in hotspot markets, constraints on housing supply–labor, lending, and lots–will retain their stubborn hold on development, and the somewhat-set template for continued moderate recovery across the residential new construction market will punch out a 2017 that bears a more than passing resemblance to this year and last.
For a thorough blast across the national bough of economic, demographic, geographic and business conditions forces in play, and their specific impact on housing starts, new home sales, and remodeling and home improvement expectations for 2017, have a look at the Metrostudy 4Q16 Housing Webcast, “Where Are We in the Housing Cycle?”
Metrostudy chief economist Mark Boud runs a clinic on statistical clarity and logical economic narrative. First, he deconstructs his own “model” of business assumptions and inputs one by one; then, he reassembles them into his projections for 2017. As a bonus, Metrostudy regional directors for the Mountain (John Covert) and Pacific Northwest (Todd Britsch) zero in on their respective regions for a deep-dive projection for what’s to come next in Denver, Salt Lake City (Eric Allen), Portland, and Seattle.
Among the noteworthy insights Boud extracts from his model is 1) that demand eclipses supply for as many as five more years, and 2) what that means for pricing. Here, Boud illustrates a demand-vs.-supply differential, and how that imbalance will net out to an almost 3 million home shortage–undersupply–by the end of next year.
Here’s the Boud forecast for housing starts in 2017 and 2018, a steady, glacial upward push to heights well below last-decade peaks.
For comparison’s sake, here’s a couple of other forecast estimates, this one spotlighting single-family starts expectations, from National Association of Home Builders chief economist Rob Dietz.
And here, the research team at Wells Fargo blends a series of real estate and trade group forecasts into a composite reading on how 2017 should play out for housing. By and large, everybody’s directionally in the same ball-park, with some perennially more optimistic than others.
Now, for a bit on the potential disruptors–to the bad and good–of these forecast assumptions. One is what happens, potentially as early as December, if and when the Federal Reserve executes its next step in tightening money supply by raising its Federal funds rates on borrowing costs. Here, Wells Fargo managing director and equity analyst for home builders Stephen East notes that the single biggest impactor of housing affordability is interest rates, not housing prices. He shows here that during the 2004 to 2006 housing boom run-up when prices were soaring, housing affordability as a function of the percentage of income a household would need to devote to monthly payments was much better then, than in the 1980 to 1983 period, when prices were not nearly as big a factor in affordability as abnormally high interest rates were.
On the other hand, another X Factor in predicting the level of housing demand has to do with household income trends, and the fact that they’ve stagnated for such a prolonged period of time.
The thinking here is that a “stealth” household income improvement trend may be emerging. The logic is this. More highly paid Baby Boom workers are retiring out of the labor force than early-in-their-career Millennials are moving into the workforce. Here’s a perspective on that from the ULI’s recent report, “Emerging Trends in Real Estate, 2017.”
The crossover point where more baby boomers are retiring than millennials entering the labor force is upon us. A Bureau of Labor Statistics (BLS) analysis released in December 2015 projected labor force change for the ten years ending 2024 as being only 0.5 percent per year. Emerging Trends has sketched the big picture in previous editions. The key change in the population cohorts from 2014 to 2024 looks like this: the number of Americans in the 25-to-34-years-old age group, the prime early-career working years, will be up by 3.2 million; meanwhile, the 65-to-74-years-old age group, those most likely to exit the labor force in retirement, will be up by 9.4 million.
Many organizations are having to accelerate compensation increases for younger associates, but they’re funding those increases by savings from attrition from among their older, higher-paid staffers.
So, that household income inertia we’ve been seeing, particularly among younger households, may be about to reflect a reality of resumed dynamic growth.
The “wait-and-then-hurry-up” stage of Millennial household formation, family formation, and housing preference behavior is about to redefine demand trends for the next five to 10 years.
About the Author
John McManus is an award-winning editorial and digital content director for the Residential Group at Hanley Wood in Washington, DC. In addition to the Builder digital, print, and in-person editorial and programming portfolio, his accountability for the group includes strategic content direction for Affordable Housing Finance, Aquatics International, Big Builder, Custom Home, the Journal of Light Construction, Multifamily Executive, Pool & Spa News, Professional Deck Builder, ProSales, Remodeling, Replacement Contractor, and Tools of the Trade.
2017 housing market forecasts — suburbs are in, low mortgage rates are out
Various real estate entities have weighed in with their prognostications for the 2017 housing market. Most observers expect home sales and prices to moderate in the coming year. They say suburbs will make a comeback while the days of low mortgage rates are over.
Of course, a lot depends on the actions of the new administration. Although President-elect Donald Trump said little about housing during the campaign, some of the issues he highlighted will have an effect on the residential real estate market, such as infrastructure spending, regulatory and tax reform, and immigration policies.
[Mortgage rates move higher for the seventh week in a row]
Below is a roundup of what the experts say buyers, sellers and renters can expect in 2017:
Realtor.com predicts “a year of slowing, yet moderate growth.” The listing service for the National Association of Realtors compiled five housing trends for 2017:
Millennials and boomers will dominate the market. Realtor.com expects these two massive demographic groups to power demand for the next decade.
Midwestern cities will continue to be hotbeds for millennials. According to Realtor.com, millennials are clamoring to live in Madison, Wis.; Columbus, Ohio; Omaha; Des Moines; and Minneapolis.
Slowing price appreciation. Realtor.com forecasts home prices will grow at 3.9 percent annually, compared to an estimated 4.9 percent in 2016.
Fewer homes on the market and fast-moving markets. Inventory is down an average 11 percent in the top 100 metro markets, and it is not expected to improve next year. Homes are selling 14 percent faster.
Western cities will continue to lead the nation in prices and sales. Realtor.com predicts prices to increase 5.8 percent and sales to increase 4.7 percent in this region.
[More homes sold in the D.C. area last month than any November in the past seven years]
One prediction you can always count on: No matter what’s happening with the economy, NAR is always going to say it’s a great time to buy. Its fourth quarter Housing Opportunities and Market Experience surveyfound that 70 percent of people say now is a good time to buy a home. NAR also predicts the rate on a 30-year fixed mortgage will rise to 4.6 percent by the end of 2017.
Zillow says the homeownership rate will bounce back even as renting becomes more affordable. The real estate data firm also sees a reversal of a recent trend, predicting that “more Americans will drive in from the affordable suburbs for work, despite urban development efforts.” Its seven predictions are:
Cities will focus on denser development.
More millennials will become homeowners.
Rental affordability will improve.
Buyers of newly built homes will have to spend more to cover rising costs of construction.
The percentage of people who drive to work will rise for the first time in a decade as homeowners move farther into the suburbs seeking affordable housing.
Home values will grow 3.6 percent.
“Those looking for more affordable housing options will be pushed to areas farther away from good transit options, in turn leading more Americans to drive to work,” said Svenja Gudell, Zillow chief economist. “Renters should have an easier time in 2017. Income growth and slowing rent appreciation will combine to make renting more affordable than it has been for the past two years.”
Redfin predicts “strong buyer interest, better access to credit and a modest and much needed increase in inventory will allow home sales to grow but not as much in 2016.” The national real estate brokerage madesix predictions:
The housing market will continue to grow but at a slower pace. Redfin expects median home sale prices to rise 5.3 percent annually in 2017 compared to 5.5 percent this year and existing home sales to increase 2.8 percent annually in 2017 compared to 3.4 percent last year. Although Redfin predicts inventory will be up slightly, it noted that “because we haven’t seen any increase in supply in the most affordable third of the housing market in more than eight months, we expect most of next year’s increase to be in the most expensive third of the market.”
2017 will be the fastest real estate market on record. Homes stayed on the market an average of 52 days this year, according to Redfin. It expects them to sell even faster in 2017.
New-construction growth will slow. Construction is “much lower than historical averages due largely to labor shortages. Given that nearly one in four construction workers are foreign-born, stricter immigration policies from the Trump administration are likely to make the problem worse.”
Mortgage rates will increase but not too much. Redfin expects mortgage rates to rise but no higher than 4.3 percent on the 30-year fixed rate next year.
More people will have access to home loans. Next year, Fannie Mae and Freddie Mac will raise its loan limits for the first time since 2006, increasing them to $424,100 for most of the country and to $636,150 for more expensive markets. “This change makes it easier for more homebuyers to qualify for a mortgage in high-priced markets,” Redfin said.
Millennials will move to second tier-cities. According to Redfin, among the places millennials are looking to buy are Raleigh, N.C.; Austin; and North Port, Fla.
The Mortgage Bankers Association predicts mortgage rates will rise slightly but remain low, purchase applications will increase and refinance applications will decrease.
“Strong household formation coupled with further job growth, rising wages and continuing home price appreciation will drive strong growth in purchase originations in the coming years,” said Mike Fratantoni, MBA’s chief economist.
MBA expects rates on the 30-year fixed rate mortgage to remain below 5 percent through the end of 2018.
“Historically low and, in some cases, negative rates around the world continue to put downward pressure on long-term U.S. [bond] rates, keeping them lower than the domestic growth environment would otherwise warrant,” Fratantoni said.
Many times over the past few years the refinance boom has been declared over only to have world events conspire to revive it. Although he adds a caveat to his expectation, Fratantoni said he expects fewer refinances in the coming year.
“The world is an uncertain place, and there is always a chance that rates could drop again in response to global turmoil,” Fratantoni said. “But we expect that refinance volume will most likely be much lower over the next few years as homeowners have repeatedly had the opportunity to lower their rates, and there will be fewer households with an incentive to refinance if rates follow the path we are projecting.”
/cdn0.vox-cdn.com/uploads/chorus_image/image/52355673/women_homebuyers.0.jpeg)