Let’s say I owned a 1/4 acre lot in the Mid West somewhere that is valued at $50K. I build a perfectly nice house there costing $150K and I have a house valued at $200K.
Now say I have another 1/4 acre lot located in the middle of a city valued at $1M. How much would it cost to build the exact same equivalent of the $150K house on this plot of land? Would it be $150K? $175K? $500K?
If there is a cost increase, where is it coming from? More expensive labor? More expensive materials? More taxes? More permitting costs?
The reason I ask is because I live in one of the hottest real estate markets in the country right now and there is new development springing up like crazy. A lot of the new buildings being put up are the cheap, boxy condos which are pretty shoddily built. It seems to me that when the underlying land is so expensive, construction costs become almost a rounding error compared to the cost of land and it seems like a no-brainer to build higher quality housing.
I don’'t know any reason your $150K house would cost more to build on a $1 mil lot in SF. However, it seems like it might be imprudent. You’d be paying taxes on a $1.15 mil home. Unless you must live in SF, you could lease your $1 mil lot to a condo builder, and make enough to build a really splendid home in the mid-west.
That. I built a house on the SF peninsula and also one in NW Montana, and all the costs associated with building a house were more in the Bay Area.
Land, of course, is much cheaper in MT, and the cost to build was a lot less ($125/sf compared to $200+ sf). Labor is much higher in CA than MT, and materials were about the same. There were a lot more building permits I had to buy in CA, and taxes are less in MT.
Of course the house I built in CA was worth a lot more than the one I built in MT, due primarily to supply and demand. When I sold my CA house in 2008 (before the crash) I made a lot more than I will ever make if I sell my house in MT someday. There are always tradeoffs.
One thing to keep in mind is that unless they’re getting a big discount on the land (which in a city they probably aren’t), the developer isn’t really making any money on the land transaction. The developer’s profit margin is all on the construction end of things and it isn’t going to be radically different when they’re building on more expensive land. So there’s always going to be a motivation to cut corners.
In fact, it may be the other way around sometimes-- if you think of a typical McMansion type development where the developer buys a huge swath of cheap rural land, they are making a pretty good profit on the land and so can afford do a little bit less penny-pinching on the construction. In the city, the whole “rounding error” issue works the other way too. The value of the actual structure is so low compared to the market value of the land that a better-built unit isn’t going to significantly increase the sales price. Especially if it’s a bunch of little condos at the bottom of the market, the developers may find that they can’t charge enough extra for nicer units to justify the extra cost, so their profit margin is maximized by building as cheap as possible.
All of the above, plus higher insurance costs. It probably won’t cost more to purchase the materials but it will cost more to transport them. Your labor costs might actually go down, though, depending on where exactly your proposed sites are. Construction in urban areas can take advantage of an endless supply of day labor and the like which may not be available depending on how rural your midwestern plot is.
ETA: dolphinboy’s California comparison doesn’t quite work because California is more expensive all over, not just in the cities. You might do better to compare rural and urban Texas, say.
See, this is what I don’t understand. As a house buyer, if I were faced with the choice of a $1.2M cheap and chintzy house vs a $1.5M really nicely built construction, why wouldn’t I overwhelmingly prefer the latter?
Marginal ability to pay for housing really is a continuum. I think it’s common to think that both those houses qualify as “very expensive” and that someone who could afford one could afford the other, but that’s not true.
There are people who can afford a $1.2 million house who simply can’t afford a $1.5 million house. Because even people who can get approved for a $1 million mortgage can’t just conjure up an extra $300,000 out of nowhere. And perhaps they have reasons to stay in an area with very high land prices, so they buy the one they can afford.
I, personally, live in a fairly old and run-down tiny house in a very rich neighboorhood (though, I rent). Would I rather live in the much nicer house across the street that just sold for $1.5 million? Yes, very much so. Can I afford to? No. But I have an ocean view from my living room and I’m close enough to walk to work and bike to the beach or the mountains. So I pay probably way more than most people would think reasonable to live in a crappy little place on top of some very expensive land.
The base guideline for qualifying for a mortgage is (or used to be) three times your salary. For example a person making 100k should be looking in the 300k range. If that person wanted a 350k house they would probably be required to have 50k in down payment. Some of those rules were skirted though… which resulted in a lot of people who had mortgages they couldn’t afford.
Back on topic… Homewyse has a very good cost calculator for just about any home project you can imagine, based on zip code. The differences are not that vast.
It can work both ways; building costs can also be considerably cheaper in inner city areas with high land prices as opposed to an acreage.
It can be much harder to get trades when there is an extra hour or more of driving to get to a job site, deliveries may cost more and may take longer to schedule. Site supervision is more complicated the further away you are from suppliers and other services, not to mention other job sites. Sometimes you run into a snag and need one measly part or tool to finish a job so the next trade can come in tomorrow. In the city its a one hour excursion to go pick up that part or tool, on an acreage it might mean you have to delay the next trade another day.
I think that’s more or less true for a single house on a really expensive lot, but if you’re subdividing that $1M lot into a bunch of $200k condos, you’re more or less selling to the bottom of the market (even if the bottom of the market would be way up in the top of the market in a cheaper area) and there is definitely going to be a market for relatively cheaper construction.
I understand marginal decision making…but it still seems like a waste. If you can afford the house+land (even if you bought it when it was cheap, by living in that house rather than selling you can afford the “opportunity cost” of not having the million dollars or whatever your place is worth), you should be able to afford a nicer structure.
SF used to be deeply concerned about what was built in it.
Those South-of-Market condo stacks are on land originally zoned for industry (there were still hitching posts in SF in 2000 and not the restored ones).
Maybe they don’t care about shoddy condos as long as they get the tax revenues from (55 stories of condos * 8 units/floor * 900K/per unit = $396,000,000 in taxable property. Add the 1st floor as commercial, and those eyesores are pure gold.
At those prices, they can afford to sink the pylons (that area is swamp - the original Mission was a plank toll road) required and brace for the quake.
For those who don’t remember: the buildings which failed so spectacularly in the Loma Prieta (1989) quake were built on fill. Those hi-rise condos are in for a surprise. The higher, the more it will sway (if the design works).