I think this commentary by home builder Chuck Miller of Idaho is worth a look for anyone thinking of buying a home today.
Chuck implies that we cannot return to sound mortgage lending standards because it’s too expensive to build houses that could sell cheap enough to qualify. By “sound mortgage standards” he is referring to homes valued at 2.5 to 3 times income, 30 year fixed rate mortgages at 80% loan-to-value and a 20% down payment.
Chuck maintains the median price of just building a home exceeds the ability for a median income to pay for it, essentially. He goes on in detail about the prices of labor and materials, etc. and concludes we cannot return to sound lending practices because it is just plain unaffordable. Then at the very end he says in order to return to safe lending “We would build fewer new homes and the ones we do build would be much smaller homes on much smaller lots. And home buyers would certainly have to adjust their expectations.”
Well, what about that? The new homes this guy is talking about financing are on average 3300 sq ft on 12000 sq ft properties! I mean, since when is everyone entitled to live in a home like that on an average income? If that’s what buyers are expecting, then yes they certainly WOULD have to adjust their expectations. My goodness. We need a deflationary “expectations” bust.
That brings me back to talking about deflation. This guy sees prices continuing to go up for materials and labor, etc. This will not be the case for long, especially in the construction sector. Please! Has he not heard about the unemployment problem yet? Maybe the industry is holding out a little better in Idaho. I think half the unemployment rate is due to construction workers out of a job. (Don’t know the real numbers on that, but it’s huge.) Building starts are on the skids. There’s no demand. So… prices will fall on all that stuff right along with the rest of the deflating economy, for sure. This dude’s still living in a bubble, as are many many other folks across the nation (the globe!), including the revered leaders in our very own dear government.
The gist of the matter is there is no way to work except to return to sound lending practices. It’s the only way to achieve and maintain stability. Everything else will adjust to that. It’s a mathematical truth. It’s like chemistry- everything breaks down until equilibrium is achieved. You just can’t mess with Mother Nature.
Return to Sound Mortgage Standards
Chuck Miller, Builder