Housing can and does drop below construction costs.

builders, like R.E. agents, are often full of it.

Interesting numbers indeed. Any rather debunks the "theory" put forth by some homebuilders that prices "couldn't fall any more" because they could never go less than the cost to build.

Good info Mark. Particularly about the cost of construction and how it affecting the land value. At one point, the majority of the value of homes was in the land. But you cannot build for what you can buy these days, hurting construction even more.

The home price cuts have been coming furiously into my inbox since last week's financial meltdown. Several properties I follow have fallen out of pending status last week and one in particular is now a spectacular buy but I think it could fall further in price given the current situation.

One of the weird things about this downturn is that in many areas the prices are getting well below the cost of construction of the house alone, essentially valuing the land at zero. My builder friends still insist that construction costs are $200 a square foot retail, $150 a square foot wholesale but prices in many areas are averaging $150/square foot (the wholesale price) and in some distressed areas of the East Bay are nearing $100/square foot, which would seem to be less than the cost of construction, with land valued at $0.

This makes me wonder if the real cost of construction has dropped. It should, because construction materials have halved in price and thousands of construction workers around the country are out of work. For at least 15 years, construction costs outstripped inflation by a wide margin. I think this is payback time, in more ways than one.

In the really distressed category there are now 382 homes for sale for less than $100,000 in Richmond, Vallejo, Antioch, Pittsburg and Oakland.
About half of these properties are selling for under $100/square foot. With these ultra-distressed properties, either the land is worth zero or the house is worth zero, and if the price drops keep cascading, both will be worth very close to zero soon.

Finally, the Libor rate, which so many adjustable loans are tied to, rose almost half a point in the last week. This means that when future mortgage adjustments occur, they will be half a point higher than they would have been before last week, and this puts more strain on the homeowners impacted by these adjustable mortgages.

Mark