Since there are lots of questions in each paragraph, I will address each paragraph:
Paragraph 1: It’s hard to say how much environmental regulations add to the cost of subdivided land to a builder because you invest not only capital but lots of time (I negotiated with the Resource Agencies for more than nine years and still ended up where they wanted me to because they have ALL the power). And half of my processing costs were towards environmental issues. So, what does that equate to down the road? My WAG (wild ass guess) based on experience is probably 25% of the finished cost of the home. Any premium on a lot is already reflected in the price. And a lot of land in San Diego has become LESS valuable due to the environmental restrictions placed upon it. If housing prices fall (on existing homes) it will be a purely market phenomenon because the land value has already been factored in. If new home prices fall (all other factors such as square footage and spec level the same), then yes it would be due to the cost of the land. Speculation in Arizona recently and Las Vegas a few years ago was driven in large part by California speculators who got priced out of the California market. How much was due to “investor” activity I have no clue but again my WAG is up to 25% in some markets.
Paragraph 2: I can remember selling land to homebuilders in the early nineties that were using construction costs of $ 35 – $ 40 per square foot on a pretty nice home. So using simple math, construction costs have probably doubled in the last 15 years. Again, building one house as opposed to several can easily double the construction costs, assuming the same level of spec. My brother, who is a contractor, just did a beautiful remodel on a large home in Point Loma and the cost per square foot was in excess of $ 400 (but that includes demo work and all sorts of other things that you don’t deal with in a new home). Remember, you have to compare apples to apples when talking cost per square foot and the spec level is what determines that as well as the economies of scale (if you are a tract builder). A single home builder has to make a much larger profit margin than a tract builder. As far as building your home in five years, just using real inflation (which I think is about 5.5% as opposed to what’s being advertised) that $ 168 per foot would be about $ 220 per foot, not taking into account any increases in certain materials that may experience shortages (like concrete or lumber). As far as what your house cost to build if you got at least three bids and they were all pretty close, you probably got a fair deal from your contractor. Something else you have to consider is the quality of the work that your contractor delivered. My brother can oftentimes charge up to 20% more for his work because he works with people who are very particular and want high quality. Merchant builders are absolute pros are keeping quality up and costs down. They know to the penny what it costs to build a house, especially if they are building the same home in several different markets. A single homebuilder simply can’t compete with that.
Paragraph 3: There was an article in today’s paper addressing the boomers appetite for second homes. I think the boomers will want to start trading down in a big way within five years or so but the question is will there be buyers to take those homes. And if there isn’t a large market for that, it will depress prices in that range or the boomers just won’t sell. I think you will see a lot of boomers moving to cheaper, warmer climates (Arizona, Nevada, New Mexico and Texas) but not necessarily California as it is still way too expensive for most retirees. I think family size will shrink and the next generation will marry later but they will still want the large home. That’s pretty engrained in our psyches (unless there is a huge fundamental shift like everyone wants to go green, which may be absolutely necessary if things continue along the lines they have been for the last fifty years).
Paragraph 4: Yes, I am blessed to be able to own my home free and clear. However, had your house been paid off, you say you wouldn’t have sold. I thought you sold to make a profit, so it wouldn’t matter if the home was paid off or not. I’m just a little confused here. Did you sell to reduce your payments then?
Paragraph 5: I am in short term treasuries and laddered bonds. I want to stay liquid until I see a clear direction in either the stock market or the real estate market. Making predictions, especially with your cash, is very dangerous. Check out http://www.treasurydirect.com where you can buy treasuries without the normal fees. I also like well diversified index funds. There is an absolutely excellent website at http://www.ifa.com Read everything on that site as well as the e-book and it will totally change the way you look at investing. Another great resource for index funds is a very bright guy in Monterey named Dr. Steven Evanson. His website can be found at http://www.evansonasset.com Both sites use Dimensional Fund Advisor products, the best funds on the market, bar none. I have researched the subject of investing for several years (I’m real conservative when it comes to my capital) and am convinced that for the regular guy on the street (read that pretty much everyone), a well diversified portfolio of index funds is the best way to go. Lastly, if you have a bit of a risk gene, commodities may be a good balance to your portfolio but I would only invest in the Jim Rogers International Commodity Index Fund or with a competent CTA (lots of information can be found on CTAs at http://www.trendfollowing.com (read Michael Covey’s book “Trend Following”) and there is an excellent white paper on the commodities market at http://www.trendfollowing.com/whitepaper/commodity-investing2.pdf#search=’Rogers%20Commodity%20Index%20Fund’
Paragraph 6: I have no idea how much housing prices will fall because each market is so different and localized. You can always tell when a market is topping because prices continue to increase but volume starts to fall off (that means the last lemmings are getting into the market). I believe it was Warren Buffett who said, and I paraphrase “Be greedy when others are fearful and fearful when others are greedy.” When everyone is scared to death that real estate is in the toilet, that’s when you should start buying. No one has a crystal ball and predictions are always temporary. Real estate will fall (it always has) and at some point it will recover (it always has). This market is particularly scary because in my lifetime there is no precedent for it. So it’s anyone’s guess what will happen. Stay liquid and keep reading Rich’s excellent postings as well as those of the members and bloggers. Most of those people know more than the “experts”. Be cautious and trust yourself to make the right investment decisions (after careful study and analysis).
