Spec houses, once a staple, now few and far between
Is the day of the “spec house” — a home put up by a builder on speculation, without a buyer already lined up — over?
The spec house used to be a staple of Ridgefield’s construction industry. Builders bought land, subdivided, and started putting up houses. They were confident buyers would come along. Someone would purchase the product of all that invested time and money — usually, borrowed money.
“I grew up building spec houses,” said Reed Whipple of Heritage Homes Construction. “That’s how my father made a living. That’s how I made a living. That’s how I grew up.
“Spec houses are all about land,” he said. “You ‘land bank’ your lots. You sell it, and move on to the next one. That’s the way it was always done.
“In the heyday, we did four or five a year — and decent size homes, too,” he said.
“I haven’t started a new house in two years,” said Whipple.
What’s Heritage Homes doing?
“We do remodeling work. We’ve always done remodeling work,” he said. “There’s also opportunity today in the remodeling business, because people are buying these older homes — new bathrooms, new kitchens. And, we have a property maintenance business that does a lot of property management, and we do a lot of refurbishing.”
Joe Fossi of Pelham Homes told a similar tale.
“I’ve been building for 30 years, and I’ve never seen anything like it,” Fossi said.
“You literally can’t buy a lot in town right now, at market price, build a house, and sell it at a profit. It’s that simple.”
Retired, moved, or folded
Fossi, too, is focusing on other types of construction work.
“Additions, renovations,” he said.
“Quite honestly, I would say 15 years ago, Ridgefield had twice the number of builders it has now. They’ve either retired, or moved, or gone out of business.”
Fossi also has the perspective of a longtime member of the Planning and Zoning Commission.
“On Planning and Zoning, we’re not seeing any real development. We’re seeing re-development,” he said.
“We haven’t seen a subdivision come before us in years. I’ve been on the commission for 12 years now. I’d say since I’ve been on the commission, we’ve seen three or four small subdivisions.
“I haven’t seen a tear-down in a long time,” Fossi added. “What you are starting to see is some flips, where people buy a tired house and put in new bathrooms and kitchens, and a paint job, and then sell it. That’s happening.”
Assessor Al Garzi sees it happening.
“It’s hard to build a spec house today and actually sell it for more than it’s worth. If you’re not going to sell it with a profit on top of it, there’s no motivation,” Garzi said.
“Houses are being sold — existing houses — and the local builders ... they’re putting in new trim, new kitchens, new bathrooms, and painting them, and there’s enough profit to do that.”
The change is evident in the market, said Jack Baldaserini of Coldwell Banker Real Estate.
In mid-November there were five spec houses on the market, ranging from $1,295,000 to $1,895,000, he said.
“Back in the heyday, 2006-2007, it would have been about 10,” Baldaserini said.
Fossi recalled even more spec houses on the market, back at its peak.
“I would say well over 20,” he said. “It’s way less than half what it used to be.”
It’s about costs and prices.
“The cost of materials is up significantly, lumber costs,” Fossi said. “Costs are going up, and what’s happening is the competing homes are going down, that are resales.”
Builders have to price high enough cover their costs — land, materials, labor, borrowing — and then make a profit.
“Somebody who’s building a 5,000-square-foot house, brand-new — it’s got to be priced out at $1.8 or $1.9 million,” Fossi said. “A buyer can come into the market and find a house that’s six or seven, eight years old — the same size house, same bedrooms, bathrooms — for $1.3 million or $1.4 million.
“It’s not uncommon to see people who spent $2 million for a house in 2006-2007 to be selling it today for $1.3 million, $1.4 million. They’ll take their lumps, for whatever reason ...
“The builder, to pay his construction costs today, has to be up there at $1.7, $1.8 million.”
As town clerk, managing land records, Barbara Serfilippi sees what people are buying and selling.
Are there many “new” houses — spec houses — being sold by builders?
“I haven’t seen any, really,” Serfilippi said.
Most building these days is multi-family — condos.
“I don’t think there’s any new construction — except for places like the Elms, 77 Sunset Lane. Now we have the apartments,” she said.
Even in multi-family, new units are costly.
At 77 Sunset Lane townhouses are three to a building, and coach homes are in three-story buildings of 15 units each.
Closing prices on the coach homes go from about $480,000 to $560,000, and townhouses are “in the high-700s to the mid-900s,” she said.
“The Elms, those are over $1 million,” she added.
Supply and demand
The dynamics are pretty simple, Whipple said.
“With spec houses, it comes down to supply and demand, and there’s a lot of supply of houses over $1 million right now, and it’s holding the prices stagnant,” he said.
“Homes that I built 10 years ago are being sold at a price that I couldn’t build them for today.
“Everything is predicated on what you’re paying for your dirt — the land dictates the cost of the house. It’s not that you’re making that much more on your product, you’re paying more for your dirt,” he said.
Fossi outlined the math.
“I would say a building lot, depending on where in town it is, and how big, I’d say the least expensive you could find a lot in Ridgefield is $300,000, and it would go up to $500,000 — and that’s just the dirt … that’s before any site work,” he said.
“So you put up a 3,000-square-foot house, you’re talking $600,000 for the house, plus the cost of the lot. If you paid $300,000 or $400,000 for the lot, you’re up to a million before you pay any real estate commission, or profit, or soft costs on your money.
“So, you have to sell a house for a minimum, to cover your risk, at $1.2, $1.3 million, at minimum — and now you’re priced against a 5,000-square-foot house that’s 15 years old,” Fossi said.
The slow market affects the sale of lots, too.
“Lot prices have come down significantly,” Baldaserini said. “Back in the heat of the market, if a lot came on for $500-550,000, it would have been sold by the end of the day — a builder would have snapped it up. Today, it’s tough to sell a lot.”
Lower land prices haven’t helped builders much, because other costs keep rising.
“Costs are going up a lot, even though prices of lots are going down,” Baldaserini said.
There’s an upward trend in material costs, aggravated by recent events.
“Floods in Houston, floods in Florida, fires in northern California — a lot of the construction materials have been directed into those areas, and it’s raised the prices,” Baldaserini said.
Some buyers are committed to the idea of new construction, but in the housing market many are comfortable with used goods.
They’d rather have the 15-year-old 5,000-square-foot house than the brand-new 3,000-square-foot house for their $1.2 million.
Builders face lots of that kind of competition today.
“You can find dozens of houses, 5,000 square feet, 15-16 years old, for $1.2, $1.3 million,” Fossi said.
“It’s an interesting dynamic,” he said. “The value of houses, especially higher end houses, appears to be going down, and the cost of construction is going up. And you know, interestingly enough, the cost of a building lot, it’s not gone down enough to where you can justify building a smaller house — which is really the market. Somewhere between 2,800 and 3,500 square feet seems to be the real sweet spot in the market.
“It seems like the market taps out — anything up to $1.2 or $1.3 million is moving,” Fossi said.
“My sense is what we’re seeing is millennials have kids and they move out of more urban areas because of the cost of private schools in the city, they’re moving to towns like Ridgefield that have great schools. A $6-$7-$800,000 house, you move in, you pay $15,000 a year in taxes, and you can educate your kids.”
These young families aren’t looking at the top of the market, they want starter homes.
“Ridgefield has got outstanding schools and you can buy into Ridgefield and you can get a move-in-condition house for $600-$700,000, and put your two kids through school. You’re paying $13-$14,000 in taxes — that’s not a bad deal,” Fossi said.
Baldaserini, the Realtor, sees it, too. The $600,000 to $800,000 market segment moves quickest, he said, with the young families Fossi described often competing with older folks, downsizing.
“The best price point today in Ridgefield is in your 6’s, 7’s 8’s, in that range,” Baldaserini said.
“You’ve got baby boomers looking to scale down.”
A demographic shift of older folks selling bigger houses, buying smaller ones — that affects the prices of both.
“They want to stay in the area and they’re looking to buy smaller,” Baldaserini said. “Then, you’ve got people entering the marketplace, you’ve got these millennials...
“They’re putting pressure on that price point.”
He noticed one way builders are trying to sell new houses, without the risk of building on speculation.
“There’s a couple on the market where the builder’s offering blueprints. He hasn’t started building, given the economy,” Baldaserini said.
“Come see the blueprints and if you like them, I’ll build it.”
The builders still believe in homeownership.
“Owning a house, that means something more than owning a stock,” Whipple said.
“I still think a single-family home is the best investment any person or family can make. It’s yours. It’s tangible. You own it. It’s your yard, your property. You take pride of ownership,” Whipple said. “This is a great investment. It always will be.”