Docteur,
You present an important point. If we consider $100 per sq. foot of construction cost (higher end that you mentioned) and the historical norm of land cost (including fees and permits) being a third of the house price; including a 5% margin for the builder we get around $160 per sq. foot. Land prices which are mainly speculatory might come back to historic mean (I don’t beleive in the ‘there’s only so much land to build’ argument). Isn’t this around 50% of what new houses are currently selling for in some neighbourhoods.
Builders might have paid more for the land. Now they have an option of either taking a hit and completing the projects to get some of their money back or sell the land or hold the land. If every builder knows that the market is going down, who will buy the land? If some one does buy, Is’nt he/she bullish on the market and will build? If they are holding the land are’nt they taking a hit on ROI and how long can they hold? There is also the scenario of already constructed (new) inventory which is losing demand. Will builders just hild on to these or sell them below their replacement costs.
I would think all these scenarios will play out in varying degrees. If this happens to the new house market, how will the resale market hold?
