Reader Christine poses an interesting question:
I work for an architect downtown–he just spoke with someone today who said that the cost of building materials is expected to triple as a result of Katrina and having to rebuild New Orleans. Since there are barely enough supplies for the US without having to rebuild, how do you think this will affect the housing market? Would housing costs go up because it is now even more difficult to create new supply?
Like I said, a good question, but the answer is no: a rise in the cost of construction materials will not have a notable influence on San Diego home prices. I say this for a couple of reasons.
The first is that if you buy a San Diego house right now, the vast majority of the money you pay goes to two things: the lot, and the speculative premium on owning the lot. The cost of the building materials (we’re not even talking overall construction costs, just materials) accounts for a very small portion of the overall cost of housing out here, so an increase in materials cost won’t have much effect on the bottom line.
The second reason is sort of a corrolary to the first. San Diego home prices are not set based on what they cost to build—if they were, prices would be a whole lot lower. Prices are where they are because of the multi-year speculative mania that has taken place in the San Diego real estate market. For the time being, anyway, the amount the people will pay for housing is limited only by how much the banks will let them borrow. The costs faced by homebuilders don’t even enter the equation.
San Diego real estate is a market built almost entirely on credit. If the devastation in the Gulf Coast were to induce the Fed to start loosening credit, that might very well have an effect on our housing market. But compared to lending conditions, materials costs barely show up on the radar screen.