Home prices in Michigan rise as construction slows

Breana Noble
The Detroit News
Home Builder Vito Castellana in one of the detached condominiums his company is building in the Cross Creek development in Burton, Mi, on Oct 3, 2018.  Michigan home builders are facing a shortage of sub contractors and higher construction costs.

The Home Builders Association of Michigan issued a "wake-up call" last year about a near-crisis in a shortage of affordable homes. But instead of ramping up, construction has slowed.

Blame it on rising costs, regulations and shortages of land and labor that have made it more expensive to build homes. Meanwhile, high demand is driving up prices in Southeast Michigan, especially for the starter houses and midsize homes that many builders cannot afford to put up.

Bradley Jernigan, an associate broker for Century 21 in Clarkston, said home prices are up about 4-6 percent in Oakland County this year. First-time home buyers often run into bidding wars and pay above asking price. Combined with increasing interest rates, some are being priced out.

"The homes under $250,000 in our area, there is a lack of inventory," Jernigan said. "Those homes sell very quickly, especially if they are updated and they are not distressed properties."

On-going construction of a luxury home at the David Campo Builders 'Casa Loma' development in Novi.

August housing permits for single-family home construction decreased 1.8 percent year-over-year. In Southeast Michigan, the drop was even more severe — down nearly 10 percent.

For the first eight months of the year, the number of approved permits statewide — 11,481 — was a nearly flat 1.8 percent increase from the same period a year ago. That's a marked change from 2017, when housing permits were up 10.2 percent over 2016.  Bob Filka, president of the Home Builders Association of Michigan, said there is little chance the rest of 2018 would make up the difference.

To keep up with normal cycles of population growth, changing demographics and aging housing in the state, the Lansing-based builders association estimates around 25,000 homes should be built in Michigan in 2018, a number not reached in nearly a decade. The group expects fewer than 17,000 to come online this year.

Most of the homes that are under construction are large and more expensive than what most first-time buyers can afford.

Filka said a majority of those being built range between $300,000 and $500,000. Ron Trombetti, an associate broker for Vanguard Realty Group that specializes in new construction, said new homes in Macomb County typically run $400,000-$500,000, while in Birmingham or Rochester, they run even higher.

Michael LeVan, a real estate agent with William Adlhoch & Associates that works largely in the Grosse Pointes, said all the properties he's sold this year priced at $350,000 or below have had multiple bidders.

"The financial crisis 10 years ago put a lot of people in the lower end of the market out of ownership and back into rentals," LeVan said. "Now that the economy has remained good for a number of years, they're back into a position where they can buy."

Steve Zuccaro, 47, had spent more than a year looking for a home in the Pointes and was wondering if he would be able to find one by the end of 2018.

"Any time we went to a showing, there were always people right before us and after us," he said. "It was like you have to make a decision right now. You can’t sit on it. I'm not really that kind of guy."

That is, until he found the home of his dreams. Listed at $330,000, the Grosse Pointe Park house had such a "frenzy" of interest, he offered almost $100,000 above the asking price and still lost. After the top bidder fell through, however, Zuccaro was able to negotiate to a price about $30,000 less than what he initially offered. He moved in May and was able to sell his smaller home in the same community in about 24 hours.

"The whole process took about two and a half weeks," he said. "It was frantic and anxiety-filling. That's how the market was."

'That's not a lot of profit'

Homebuilders say rising costs have made it difficult to keep construction prices low. In the past year, some material costs have increased by 20 percent, after tariffs boosted prices of steel, Canadian lumber and Chinese goods.

Often those costs are passed onto buyers. But David Compo, a Novi-based homebuilder, said 30 percent hikes in lumber prices during a project make it hard on builders.

"We might spend a year on a house, and after all the work you've done, you’ve made 2 percent," Compo said. "That's not a lot of profit, and that’s the disadvantage of the materials increases during the construction contract."

Michael Stoskopf, CEO of the Home Builders Association of Southeastern Michigan, said it is unclear if the new trade deal between Canada, Mexico and the United States will provide relief. He said now that Michigan's northern neighbor is at the negotiations table, it is a good sign for getting the lumber tariffs issue resolved.

Construction workers build luxury houses at the David Campo Builders 'Casa Loma' development in Novi.

Labor costs also have increased. From 2000 to 2009, the state lost 43 percent of its workforce in residential construction — by some estimates, about 60,000 workers. Many found other employment, left the state or retired. College-focused curriculum requirements in high schools and the extended recession closed many construction-training programs.

As a result, homebuilders are competing to hire subcontractors for masonry, carpentry, electrical and other trades, due in part to a spike in commercial projects in downtown Detroit and surrounding communities. Mike Miller, a Northville-based homebuilder, said this is the first time he has seen this competition since he started in the industry in 1992.

"The commercial contractors are pulling the residential contractors and trades into the commercial business by offering more dollars, more incentives, more programs," Miller said, "which is creating a higher labor cost because the existing residential contractors, in order to keep their guys, they’re having to incentivize their guys to stay with retirement plans and more money."

Miller said the competition results in many contractors being unavailable to work on projects right away, extending 10 months of building into 12.

'Like pulling teeth'

Following the Home Builders Association of Michigan's report last year, the state has taken some steps to address the problem and increase educational opportunities.

The Michigan Land Bank is partnering with some high schools to provide parcels on which students can build houses. Cost of land has been a barrier, said Dawn Crandall, the Michigan builders association's political affairs director, but working with the land bank takes the property off its rolls while educating students in the trades. After the home is complete, it can be sold and the state can earn taxes on it.

"They see it as a win-win-win situation," Crandall said.

Homebuilders also are struggling to find land ready for construction. Following the recession, building began on developed land left empty when the housing market crashed. Now, most of those plots are filled, and builders have to look farther from metropolitan areas.

On-going construction of a luxury home at the David Campo Builders 'Casa Loma' development in Novi.

Vito Castellana, president of Shelby Township-based VIP Homes Inc., said he used to build in Macomb County, but land has become too expensive.

His company is building condominiums in Chesterfield Township and plans 74 apartment units for Warren. But for single-family home construction, Castellana is focusing on Genessee County. In Burton, he has a couple of neighborhood developments of 1,100- to 1,400-square-foot homes that start at $150,000. He's sold 40 in about a year and said he could have sold more if he had the inventory.

He said land is more affordable there and the townships respond in a reasonable time to his building-permit requests. Homebuilders said some building departments may take months, even years before they give approval for permits.

"It can be like pulling teeth to get a building permit," Castellana said. "The communities I'm in, they can turn ours around in about a week, if not less. That's very, very helpful in terms of getting into the ground before the winter comes about."

Some communities are taking actions to better support homebuilders. Filka identified Livingston County as well as Cascade Township and Ottawa County on Michigan's west side as taking steps to encourage home construction.

Jim Rowell, building official for Livingston County, said his county is decreasing its permit application cost in December for the third time in four years. According to state law, revenue from permit fees is only supposed to fund building departments. Livingston has run surpluses in recent years as more construction takes place, leading the county to decrease the cost by about 25 percent each time.

Rowell said the Livingston County Building Department's full-time staff returns building permits in 10 days if all the documents are there, "no exceptions." He said most happen in less than five days. During construction season typically between Memorial Day and October, the department offers Saturday inspections.

The Michigan State Housing Development Authority began in May a study to identify obstacles to affordable home ownership, the first of its kind since 2006. A report is expected in March. Alpena, Grand Rapids, Saginaw and Westland will function as the study's four case-studies to get a sense of the challenges and solutions in different types of communities.

"I think it’s the hope that we’ll come up with some understanding of what’s going on and where," said Laurie Cummings, market specialist and research analyst with the housing development authority. "We hope to get ideas of where to overcome challenges and obstacles in the market."