docteur, like you said it costs about $80-$100 to build a home. Since land is the biggest portion of cost, I don’t see why land can’t drop dramatically. If landowners can afford to hold on during a sharp protracted downturn, then that means that they made a lot of money during the boom.
I don’t put much credence in profit margin figures. For example, car dealerships would have you believe that they are selling cars at invoice. I don’t think they they could really do that for long. Car dealers don’t go out of busines often. In RE, say a landowner buys a piece of land for $10k then sells it for $100k. That’s a profit margin of 1000%. The new owner (maybe a related, but legally separate partnership/corporation) then puts up a building that costs $10k to build. He then sells it for $120K. The profit margin on the 2nd transaction is 9%. The builder then uses the 9% figure to justify that he’s hardly making any money. Notice that the 2nd transaction also allows the first entity’s 1000% profit to be shielded from lawsuits (i.e. construction defects).
As everyone knows, RE is full of related entities that sell to one another ’round and ’round. We’d have to carefully follow the money to determine what the true profit margin of a building/home is.
Only time will tell how RE will turn out in the next 10 years. Personally, I’m biased and I think that we spend too much of our income in RE. A big crash will be the catalyst that causes us to rethink our priorities. For example if land is so expensive, why don’t we build up instead of out (with proportionately lower prices)?
Economically, I believe that the stutus quo proctect builders. If other industries found ways to build better quality products at lower and lower costs, I don’t see why, if forced, the RE industry can’t achieve the same results.
