New home construction perks up, but regulations diminish affordability

Real Estate

Source: MTD Marketing Services LLC

Last updated on May 30th, 2022 at 02:59 am

Home sales in the Milwaukee area were up 15 percent in April compared to April 2015, and there have been increased sales for 18 out of the last 20 months.

That’s good news, especially after the Great Recession, when the housing market collapsed and some homeowners found themselves underwater on their mortgages after values dropped. Home owners have certainly welcomed the housing market recovery.

Mike Ruzicka, president of the Greater Milwaukee Association of Realtors, has said he believes area home sales could be even greater if there were more inventory for buyers to choose from. Last month, there was 5.9 months of inventory available, which is the time it would take to sell all of the homes on the market at a given time. Six to eight months of inventory is generally regarded as a “balanced” market, where sellers and buyers are evenly matched in price negotiations.

Belman Homes is building side-by-side condos on Hawthorne Hill Drive in Waukesha.
Belman Homes is building side-by-side condos on Hawthorne Hill Drive in Waukesha.

One way to create more inventory would be to build more new homes. However, it’s not that easy.

There has been an apartment development boom in downtown Milwaukee and the suburbs, with thousands of units planned, under construction or recently completed.

But the number of single-family houses and duplexes being built in the region has remained steady at just more than 1,200 a year since 2013, according to MTD Marketing Services, which tracks home start information.

For the single-family and duplex home market, southeastern Wisconsin had 299 housing starts in the first quarter of 2016, which is the best performance since 2007. The average value of the homes being built is $328,000 and the average home is 2,890 square feet.

Although housing starts have improved since the Great Recession, single family home construction is still nowhere near its 2004 peak, when 691 new homes were built in the first quarter of 2004. At that time, the average home value was $256,235.

Kristine Hillmer, executive director of the Waukesha-based Metropolitan Builders Association, said home builders have faced a lot of challenges since the Great Recession, but so far 2016 has been a “growth year.”

The issues builders have had to face have come in three waves. First the recession, when people stopped wanting to build homes and those who did want to build had trouble getting loans from banks. After the recession, there were a lot of existing homes on the market that were very affordable, which made building a new home seem less appealing.

Now, many of those homes have been sold, there is a lack of supply in the existing housing market and people are looking to build again, but Hillmer said builders are being hit with a new problem: compliance costs.

Source: MTD Marketing Services LLC
Source: MTD Marketing Services LLC

A recent study by the National Association of Home Builders shows the average cost for home builders to comply with regulations for new home construction has increased by about 30 percent over the past five years. These costs include various federal and municipal fees, hook-up fees, storm water and building permits. The average cost imposed on the builder, and passed on to the homeowner, to pay for these regulations is $84,671 for a new single-family home, up from $65,224 in 2011.

“It’s an uphill battle,” Hillmer said. “I can remember not that long ago when you could buy a house for $84,000. When you talk about building starts and new construction versus buying an existing home, you can see why there is a big gap.”

Michael Kaerek, president of West Allis-based Kaerek Homes Inc., said increased building costs have made it nearly impossible to build a home for less than $250,000 and doing that is difficult unless the house is in an outlying area.

“It’s hard to build for the entry level (homebuilding) market, which is concerning,” Kaerek said. “Unfortunately with the cost of land, regulation, insurance and all of the overhead, new homes are more in the $350,000 to $400,000 range.”

Kaerek said he could build a $250,000 home in Johnson Creek, Hartford or Ixonia, which is where people have started looking because land there costs less. Once they get closer to cities, it’s too expensive, he said.

“Oconomowoc, Pewaukee, Waukesha County, costs the same to get a building permit, but you can’t do anything there for less than $350,000 because of the cost of the land,” Kaerek said.

David Belman, of Waukesha-based Belman Homes, agreed that to be centrally located it will cost a new homebuyer at least $350,000, which is about 12 percent more than buying an existing home.

After experiencing a slow fall and winter, Belman said the spring rush has begun, which he attributes to people being frustrated with low inventory and being comfortable enough with the economy to build again, despite the higher cost. If you are planning to build a new home, you may need to look for an underground electric trenching contractor to install electrical wiring underground.

“It is expensive, but at the same time, it’s a great opportunity to get a more energy efficient home that you won’t have replacement costs with,” Belman said. “It’s hard to buy a house and then have to remodel two to three years down the road.”

A good part of Belman’s business this year has been condominiums. The company has been building side-by-side units off Highway 18 in Waukesha, which Belman said has been appealing to baby boomers who had been putting off selling their homes until the economy rebounded.

Bielinski Homes also has had success with condo projects. The Pewaukee company is currently working on a 10-building complex with side-by-side units in Waukesha called Stillwater Villas at River’s Crossing.

The company also is working on a subdivision in Dousman and adding new phases to existing developments in Mukwonago and Germantown.

“We’re definitely more comfortable than we were, but it’s not where we used to be before the economic downturn,” said Paul Bielinski, chief operating officer of Bielinski Homes.

There were just more than 3,000 area housing starts in 2004 – almost three times as many as the past three years. Bielinski and the other builders interviewed don’t think the local market will ever get back to those numbers, but they also don’t think the future is as dire as some say.

“I know some people think there is doom and gloom that the (millennial) generation will never buy homes, but I don’t think it’s much different than what my generation did,” he said. “I waited until my early 30s to buy a house. It’s all part of the life cycle.”

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