Here is something that I think explains SOME of why NEW homes cost more in CA: Because it takes a long time to get land entitled (permitted for building houses) and a lot of environmental regulations have to be dealt with, developers demand a much larger profit to build in CA vs. other states. Developers are more than willing to take on the challenge but they want a much larger profit to compensate for the added time and risk involved. This results in high land valuations for buildable lots and higher construction costs.
The above fails to fully explain, however, why CA prices have doubled over the last 5 years while TX prices have been flat. You would think the two states would maintain their relative price differences.
I don’t think the market will continue to bear these high CA costs because people just don’t make enough $ to keep paying these high CA prices. Land values will fall due to lower demand and construction costs will fall due to lower demand for labor and materials. As for the builders’ profits, I have a hunch they could cut their profits quite a bit and still be in the black. Whether you’re talking about new homes/condos or resales, buyers have been willing to pay these ridiculous prices primarily due to “irrational exuberance”. That is now unwinding.
