Rising build and insurance expenses are quietly killing your deals
While housing inventory has improved in many parts of the country, that doesn’t mean that enough homes are being built.
One of the biggest headwinds affecting housing affordability is a limited number of new homes under construction. Some challenges include construction costs, while others involve excessive red tape that builders must navigate to get housing approved.
Congress is working on bills that will hopefully address some of the challenges facing builders. One broker said changes must be made to both building and insurance costs to help homeowners.
Darshit Chokshi (pictured top), president and CEO of Aequitas Mortgage, said the first main issue facing buyers is that new home construction is still too expensive.
“The primary issue with affordability is that construction costs are still too high,” Chokshi told Mortgage Professional America. “For some reason, those have not come down from that $220 to $250 per square foot here in Texas, and I don't understand why.”
Reform is needed
Chokshi said builders are not always completely transparent about the costs of building a new home, making it challenging to gauge whether the houses are overpriced.
“Builders are building smaller homes on smaller lots,” he said. “They're not building those 2,500 square feet homes anymore. They're building those 1,700 to 2,000-square-foot homes. They don't want to sell homes that are less than $350,000, so what they've done is they've reduced the square footage of the house. It's not transparent because not all builders are going to publish their material costs publicly. They just give you one line with the cost of goods sold. That's it.”
In addition to the traditional insurance costs, which brokers have lamented as part of the affordability crisis, Chokshi said the cost of replacement is also making affordability more challenging.
“On the back of those costs being used, insurance companies are now using replacement cost estimates that are also high,” he said. “The market value of a property may be $450,000, but insurance thinks that to rebuild the exact same house, let's say the house burned down, they think the same house will cost $640,000 to rebuild, which is not true. So insurance models are probably another reason that is causing this affordability issue.
“They're still running on that 6% to 9% inflation values on the projected rebuild costs. So, the replacement cost estimates, whatever source they are using, I believe there is room to reexamine, and ask if they are overinflating the cost estimates and thereby pushing the insurance premiums higher.”
Rising insurance costs
While Chokshi said he understands rising insurance costs in states affected by natural disasters, it doesn’t make sense to see premium hikes in other parts of the country, like in Texas.
“I get it with Florida having two hurricanes,” he said. “Texas has not had any bad calamity in the last seven years that cost it multi-billion dollars. There was a West Texas flood, but nothing that bad that took away $200 billion or $300 billion in claims being paid out.”
Because of these insurance challenges, especially in states like Florida and California, where natural disasters have hit, Chokshi said there is a limited number of companies offering coverage, which is also driving prices up.
“I would say there are fewer insurance carriers who are participating in every state,” he said. “I wish that state regulators for insurance would look into it. Why are they leaving? What can we change in terms of insurance structure? What can we do about making this more affordable? Texas is doing great with property taxes. I wish they could rein in insurance costs. How about we create a public-private partnership to help cover some of these costs and make insurance more affordable?”
Chokshi said he had a customer who was ready to buy a home late last year but backed out of the deal after seeing the homeowners insurance quote.
“I had a client in November, and their insurance quote for a 4,000-square-foot home was $11,000,” he said. “The borrower said, ‘I spoke with my wife, and I think we are going to terminate this contract. This is not something we can afford. We both have income now, but in a stress-test scenario, if one of us loses a job, we don't think we can afford this.’ $11,000! That’s crazy.
“I think we're all talking about a lot of options, but nobody's talking about how to rein in construction costs and insurance.”
As construction and insurance costs have increased, wages haven’t kept up. Chokshi said that since people can’t necessarily demand a bigger raise, it’s up to these companies to reduce costs.
“One big factor that we all know is that incomes haven't kept up with housing prices,” he said. “We all know that it's not easy to raise somebody's income from $80,000 to $120,000 just because we want it to go up. How about the industry bring some of this cost down so we can meet at a level where more home buyers qualify for purchases?”
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This article is part of our Monthly Spotlight series, which in January focuses on Affordability. Full coverage can be found here.
