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Housing Costs: Here's One Way They Might Go Down

CNBC.com

I was doing an interview with an analyst at Raymond James today, asking questions about which of the big public builders are better-positioned to survive this housing downturn and actually gain market share, when we ended up going off on a tangent that I find fascinating.

Paul Puryear, said analyst, was talking about affordability, and how the current glut of inventory on the housing market is mostly due to still sky-high prices. Existing home sellers are too stubborn to lower their prices enough.

Ok, I ask, so why don’t the big builders bring the prices down? His answer: they can’t, not with the houses they built and Americans demanded in the past five years. “We probably need, from a new builder’s perspective, a whole different type of construction going forward to make it affordable,” says Puryear.

He’s talking about a different prototype house. “I think what the world doesn't understand here is that we have had substantial inflation in the cost of materials that are used to build: concrete, steel, petroleum-based products, copper, pvc pipe,” Puryear continues. Why? China, India, etc: “We're out buying concrete on the world market with our devalued dollar against the bid coming from other countries in the world that are absorbing all the commodities currently, and we're in a very unfavorable position if you're a home builder,” says Puryear.

Unlike in other housing downturns, like 19087-1991, where builders got relief at the construction cost line, they’re just not getting it now. They can’t take much out of the cost equation and are in fact still feeling pressure. They simply can’t build the types of homes Americans have now come to expect, given the cost of building those homes.

So it comes down to standard of living. Let’s face it. All that supposed equity in our homes, thanks to massive price run-ups in our neighborhoods, has made us all think that we deserve to have all the amenities that were once reserved for the very rich. I’m talking about the chef’s kitchens, the granite, the Vikings, the rain shower showerheads, the double bathroom sinks.

All you have to do is turn on HGTV or open your Restoration Hardware catalogue, and it seems like all of this stuff is positively mainstream. If you walk into any new home, and you don’t see the three-car garage, the master bedroom suite, the eat-in kitchen to vaulted ceiling family room, well you think you’re in a slum.

“I think it comes home to roost right here. I think the consumer has to learn that he's going to have to live with less house for the money because the home building industry cannot deliver the product that he's been buying, given what's happened from a cost standpoint,” Puryear concludes.

Oh well. It was certainly fun while it lasted.

Questions? Comments? RealtyCheck@cnbc.com

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

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