The problem is, people want houses that builders can’t afford to build for them.
That’s the bottom-line conclusion of Wichita State University real estate analyst Stan Longhofer as to what’s wrong with the Wichita housing market today.
Longhofer predicts that disconnect will result in a third straight year of both declining home sales and new home construction across the Wichita market.
As would be expected in a tight market, prices for existing homes are expected to continue to rise.
Longhofer projects that at the end of this year, home prices will have risen by a robust 7.1 percent over 2018. He’s projecting 2020 will see a slowing of that appreciation, but still growing at a strong 4.3 percent clip.
Rising property values can be a mixed blessing for homeowners, depending on their situation.
The upside is if you sell your home, you’ll get more money for it. The downside is if you want to stay put, the rising value of homes translates to bigger property tax bills.
Longhofer, the director of the WSU Center for Real Estate, studies the Wichita housing market on an ongoing basis and presented his annual findings at the Kansas Economic Outlook Conference last week.
A few years ago, Wichita could be counted on for slow and steady growth in home sales, he said.
“But over the past two years, that growth has stagnated,” he said. “We haven’t really seen any increase and our forecast is we’re going to see more of the same.”
Paradoxically, “demand is incredibly strong,” for mid-level houses, he said. “If we could just get more inventory available for sale . . . home sales activity would be very solid.”
The balance between houses for sale and buyers who want to buy them is a measurement called “months supply.” It’s roughly equivalent to the number of months it would take to sell all the houses on the market at a given time.
A balanced market has about four to six months supply, Longhofer said. “Right now in the Wichita area, we have about a 2 1/2 month supply of homes available,” Longhofer said.
But that varies widely based on the price of homes.
In the “sweet spot,” homes between $100,000 and $250,000, there’s less than a two-month supply of available homes, Longhofer said.
For homes in the $500,000 and up price range, there’s a 10-month supply, he said.
“Even as we talk about averages and we talk about how tight the market is and what pressure there is on prices, it really does depend on your neighborhood, it depends on the segment of the market you’re in,” he said.
And builders aren’t rushing in to fill the demand for cheaper homes.
The reason, according to Longhofer, is the cost of construction has risen faster than the prices of existing homes.
Simply put, developers can’t build houses for $100,000 to $250,000 that are as nice as the buyers want them to be.
“You can build homes, but they don’t compete very well with what’s available on the existing market,” Longhofer said.
Granite and more granite
Paul Gray, a home builder and former City Council member, said it’s part of American consumerism.
“The creature comforts of modern society permeate across the board into everything that we touch,” he said. “People are going and buying new iPhones that cost $1,200 when their 2-year-old iPhone works just fine.”
Ten years ago, home buyers were satisfied with maybe a granite island in in the kitchen and Formica countertops elsewhere. Now, they want granite on every surface in the kitchen and all the bathrooms.
“I can build you a $200,000 house,” he said. “But people don’t want the $200,000 house. They want the house they see on TV, they want the $400,000 house or the million-dollar house.”
Most of the new homes being built are in the higher price ranges where the market is already soft, Longhofer said.
“What you have (in the new home market) is home buyers who have a lot of money,” he said. “They have the capacity and they want what they want and they’re going to build. So it’s a lot of custom home building.”
As a result, home building is essentially flat at about 950 to 1,000 units a year. It’s been that way for the last five years and expected to stay that way through 2020, Longhofer said.
Wess Galyon, president and CEO of the Wichita Area Builders Association, said government plays a big role in the rising price of new construction.
He said studies show that about 15 percent of the cost of a new home is complying with regulations to prepare the land for building and another 10 percent or so is complying with building codes.
“(President) Trump has done a good job of rolling back a lot of regulations but there’s still an awful lot of regulations in place,” he said.
Weather’s played a role too. Storms and flooding have caused widespread damage in places such as Texas and Louisiana, and rebuilding there has taken a lot of building materials, causing shortages and raising prices elsewhere, Galyon said.
“We used to have a handful of builders who were entry-level-oriented builders and they could build a 950-to-1,000 square foot home with three bedrooms, full unfinished basement, two-car garage and a lot, and sell it for around $110,000. Today, that home’s $170,000.”
It’s difficult to build houses that people actually want to buy in that price range, he said.
“We wish we could, but it’s pretty basic housing at that point and there’s typically no demand for them,” Galyon said. “People want more than that, they won’t settle for less, so they just don’t buy anything.”
In addition, a lot of prospective home buyers are still dealing with effects of the recession. Some lost good jobs and had to take lower-paying work while others saw their credit damaged and haven’t recovered to the point where they can borrow to buy a house, Galyon said.
“They want what they want and if they can’t buy it, they’d rather rent and wait until things get better,” he said. “Typically that doesn’t necessarily improve their situation.”