Quote:
Originally Posted by Marcu
I don't think that's necessarily true. Margins have nothing to do with total cost. Driving up costs may cause developers to simply pass it along to the buyers. Especially considering housing is not very elastic.
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Quote:
Originally Posted by Eventually...Chicago
Hey marcu, you do raise a good point and i had to think about it for awhile.
But i still am convinced that higher costs mean higher margins as developers are taking more risk, therefore require higher returns. I think this is especially true with property values as land acquisition costs are upfront and not part of construction financing, therefore are a tremendous liability. Considering developers don't develop many buildings at a time, they can't take advantage of economics of scale. So, how do they achieve greater return on a parcel that has great value? They build a higher quality building to command higher rents increasing their margins. So, while a city like new york is building only gucci's or prada's due to their land value, we are building mostly gap's & j.crew's. (with a gucci or prada thrown in every now and then!)
I'm not a finance/econ guy so i could be full of it!
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Actually that is not the case, housing, especially on the scale we are talking about, is extremely elastic. Just because something is a necessity does not mean it is not elastic, for example, look at water. Water is one of the most elastic products there is. The kind of housing we are talking about is a luxary and, as almost all luxaries are, is extremely elastic. This can easily be seen in through the fluxation in real estate prices due to economic conditions. People do not buy these condos cause they need them, they by them because they want them. Therefore one can assume that any attempt to pass on costs to the consumer would result in the inability to sell units. Again this can be seen though value engineering, they can't pass on the cost of thicker glass on Trump to the consumer, so they cut it.
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