Rising costs push builders toward higher-end houses
If there’s a big demand in the metro Milwaukee housing market for homes costing $300,000 or less, why aren’t more being constructed in that price range?
Month after month, real estate brokers talk about the short supply of existing homes under that price threshold in Milwaukee’s suburbs, especially as more millennials change from renters into buyers and are looking for houses they can afford.
In April, the Greater Milwaukee Association of Realtors reported that almost 74 percent of residential properties sold in the four-county metro area that month closed for $300,000 or less.
That might seem to imply a can’tmiss market for a builder that wants to help make up for the low inventory by putting up new homes.
But it’s not that simple, says the chief
economist for the National Association of Home Builders. Three major issues, which Robert Dietz labels the “three L’s,” stand in the way of making construction of $300,000 houses economically feasible: labor, lots and lumber.
A shortage of skilled workers, higher prices and restrictions of lots and the jacked-up cost of Canadian lumber — thanks in large part to tariffs imposed last year — make it more logical and profitable for builders to construct fewer but bigger and more expensive houses.
That’s the situation, not just in the metro Milwaukee area, but nationally.
“Historically, about 30 percent of new construction was targeted to entry level home buyers. Today it’s less than 20 percent,” said Dietz. “So the market that needs the inventory — in some ways the most because it’s the price tier where you see the most growth — is that kind of $200,000 to $300,000 range. But that’s the hardest for builders to reach because of the fact that wages are going up, lumber costs are going up, all these other factors. So builders have shifted to the high end.”
Through the first five months of 2018 in Milwaukee, Ozaukee, Washington and Waukesha counties, the average home being constructed was 2,933 square feet, with an average value of $396,662, building permit data from MTD Marketing Services of Wisconsin Inc. shows. That compares with 2,772 square feet and $292,282 in the same period in metropolitan Milwaukee in 2013.
Labor shortage
With a shortage of workers who have skills to build houses, the law of supply and demand is driving up pay, home builders say. Many workers left the industry when the long-running Great Recession punished the housing market, and few younger people have joined to replace them.
“We are seeing their wages increasing pretty rapidly,” said David Belman, president of Waukesha-based Belman Homes and a recent president of the Wisconsin Builders Association.
Belman said younger adults are gravitating to computer skills and don’t necessarily like the idea of working outdoors.
“As a builders’ association we’re trying to get the word out there that this is a great industry to get into right now,” Belman said.
Tom Hignite, owner of Miracle Homes in Richfield, said that with limited crews today earning more for their work, it makes sense for builders to use them to put up houses with a higher payoff.
“If you are the builder, are you going to build the one that’s going to make you a low profit or high profit? You’re going to build the bigger home,” Hignite said.
To illustrate how labor prices have risen, Hignite said he recently paid $27,000 for a drywall job. Two years ago, that same job would have cost about $17,000, he said.
The lack of workers to build houses is part of an overall trend in the U.S.
“The industry’s had a worker shortage for the last four years or so,” Dietz said. “We’re probably short about 200,000 construction workers.”
Prices and availability of lots
As the starting point for a new house, lot prices that rise naturally push up the costs of building a home.
“The price of the lots has gone up quite a bit,” said Belman. “We’ve kind of used up all those discounted lots that were left over from the recession.”
In addition, some note, the size of houses to be built on those lots is set by municipalities. Small houses aren’t favored by many suburbs, although some builders say lot and house sizes for a site generally are in sync with the local market.
“You can’t build brand new houses for less than probably $300,000. Part of it is zoning,” said Russell Kashian, a University of Wisconsin-Whitewater economics professors who follows the housing industry in the state.
Kashian said municipalities generally want bigger houses to be built in their communities, often 1,500 square feet or more.
“It starts there,” he said. “That is like the minimum house size.”
One of the companies most active in developing new subdivisions in metro Milwaukee since the Great Recession is Neumann Developments Inc. Among its developments is Brookdale Estates, a 75-lot subdivision now going up in sought-after Menomonee Falls and the Hamilton School District.
Schools play a big role in where people want to live, real estate professionals say.
Lots alone in Brookdale Estates were priced from $99,900 to $149,900, and the minimum size for a ranch house is 1,600 square feet. Prices for the houseand-lot packages are likely to start in the low $400,000s and go as high as the mid-$500,000s, said Steve DeCleene, president of Pewaukee-based Neumann Developments.
“From a cost point of view, I don’t think you’ll see homes in Waukesha County being built for less than $400,000 moving forward,” DeCleene said.
Hignite said he often hears from people who want to build a house for $300,000 in Menomonee Falls or Germantown, and he has to tell them it just isn’t possible in today’s homebuilding economics.
Builders say, for instance, that if a house is going to have two bathrooms, the plumbing generally will cost roughly the same amount to install whether it’s a smaller house or a bigger one. But the bigger house will sell for more.
“There’s a point where making a home smaller is no longer helpful, because you still have the parts and pieces,” DeCleene said.
Dominic Collar, of Oshkosh-based MTD Marketing Services, said Wisconsin builders don’t have as many lots to choose from as they once did.
“Availability of lots is an issue to builders in every price range, not just ‘affordable’ lots,” Collar said.
Last year, the federal Commerce Department concluded that Canada is subsidizing its forestry industry and exporting lumber to the U.S. at prices that are unfairly low. As a result, the U.S. put tariffs of more than 20 percent on Canadian lumber.
About a third of lumber used in the U.S. is imported, and about 95 percent of that is Canadian softwood lumber, said Dietz.
“So the result is that lumber prices have skyrocketed,” Dietz said. “In fact, since the start of 2017, lumber prices are up 63 percent. That’s adding about $8,000 per single-family home and almost $3,000 per multifamily unit.”
Of the three L’s — and there are other factors like regulatory costs, delay costs and impact fees that drive up homebuilding expenses — the labor shortage may be the biggest detriment to holding down home-building expenses and could take the longest to solve.
Even though the Southeastern Wisconsin Regional Planning Commission has called for more-affordable singlefamily housing in the area, builders say escalating costs make that difficult to achieve.
DeCleene said the area may begin to see more townhomes being built. But without some kind of government help, constructing single-family houses that cost $300,000 in places like Waukesha County isn’t going to happen, he said.
Dietz said it’s not impossible to build houses that more people can afford, at least in some areas.
“In some cases you’ve got larger builders who can do it at scale,” Dietz said. “Some builders can do it by kind of being more nimble.”
But, like DeCleene, he thinks additional single-family attached housing such as townhouses may be on the way.
“That makes up about 12 percent of single-family construction nationwide, and it’s a nice market segment because it offers a front door, single-family aesthetic, home ownership opportunity,” Dietz said. “It’s a little more walkable and requires less dirt — a smaller amount of land to build those housing units. A way to reach that younger generation.”