Recently, I was asked about the future value of homes in Ukiah because home sales have slowed and property values have dipped a little. Here’s why I’m not concerned: the cost to develop real estate still far exceeds the cost to purchase comparable property
A typical 1500 square foot home with three bedrooms and two bathrooms in Ukiah sells for about $350,000. To build that same house, it is likely to cost about $350,000 after all the construction costs, including building permits, fire impact fees, school impact fees, sewer hook up fees, water hook up fees, gas and electric fees, and then the actual construction costs. And that doesn’t include the land and the expenses associated with developing a subdivision, things like curbs, gutters, sidewalks, open spaces, etc., or the time it takes to develop a subdivision (think years, not months) and the tax and interest cost of holding the property while it generates no income. This all boils down to the replacement cost of a typical 1500 square foot house being way more expensive than a home you could purchase and move into next month.
So why does this matter? The difference between the cost of buying an existing home versus the cost of constructing that same type of house is so big that developers can’t make a profit. No profit means no development, and that won’t change until the cost of existing homes gets closer to the cost of building new ones.
There will always be exceptions: some people will build in this market. It may be someone who wants to build on a certain property or someone who wants to build a custom home. Another exception is a speculator who builds a home anticipating a profit, but is mistaken. Occasionally, a developer will be able to acquire property on attractive terms, reducing the cost of development and making it less risky.
However, looking at the most likely scenario, my crystal ball says development won’t be common in the short term so the long-term trend line for real estate prices is headed upward. California’s population continues to grow, which will increase demand for existing homes also applying pressure to prices.
The Home Affordability Index (a measure of how many people in California can afford to buy a median-priced home) is 30 percent right now. Historically, property values trend upward whenever the index is greater than 20 percent. No real estate agent in his or her right mind will promise that the value of any given property will go up over time (which is why I mentioned the crystal ball earlier), but notwithstanding that disclaimer, I do anticipate prices will rise over the long term.
As long as you acquire a property that you are happy with in your current situation, it doesn’t really matter if values go up. If you live in a home that you and your loves ones are comfortable in, if you have an investment property that produces income or a business property meets your needs, the benefits make the cost worthwhile today.
You need a place to live, so if you plan to stick around and you can afford it, buy a house. If you plan to come and go again within three years, maybe renting is a better option. And because the tax and interest portion of your monthly loan payment may be tax deductible, your cost to own a home may be comparable to renting.
The lovely thing about home ownership is that is that you are in control. You decide where to hang a picture, whether to plant a tree, what color the walls should be. You create stability for your family. There’s value in that.
If you have questions about real estate or property management, feel free to contact me at email@example.com or visit our website at www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 35 years.