A High-End Homebuilder Looks Ahead

RickAckerman's picture


[All the government subsidies in the world will not revive the construction industry - only demand from increasing wealth will.  The guest commentary below offers a vivid picture of the economic and regulatory factors weighing on homebuilders these days. The author is Wayne Siggard, who builds mansions for the super-rich.  A UCLA law graduate, Wayne worked for Bechtel Financing Services and was self-employed as an investment banker doing private placements in oil and gas and alternative energy project financing.  When oil hit $10/bbl in 1985, he went into the homebuilding business, turning an avocation into an occupation. His real estate operations, including land development, have primarily been in California and Utah.  Wayne lived for several years in Italy and Switzerland and speaks many languages. RA]


Large estates are what I build.  Nobody needs what I produce any more than they need a $70 million dollar Van Gogh painting.  You can spend over $1million just on a theater, or hardscape and landscape.  I spend more on appliances and lighting figures than the construction cost of a 2000-square-foot tract house.  To ask what a house costs to build is akin to asking how much a car costs. Are we talking Yugo, Kia, Chevy, Cadillac, BMW, Rolls Royce or Bugatti?


The bottom line is this: There has been a demand for mansions and palaces since the beginning of recorded history, and there always will be. In the Roaring 20’s and 1974-2005, people bought big mansions because they anticipated making a million dollar profit on a $1.5 million dollar investment.  Ego and prestige have always been factors for me, along with being a fanatic about architecture.  Despite going to a top law school and working for ten years as an investment banker, I was one of those fanatics and made my passion my business. But the market might be so decimated for the next ten years that it will appear virtually non-existent.  Even if the land were free, you could lose your shirt building a spec house today.




For the ten years between 1985 and 2002, the cost of copper varied between 70 cents and 95 cents per pound, as opposed to today’s price of around $3.50. When America was in recession, the cost of materials and labor fell.  If the economy was booming, it rose. Starting in 2002, the demand from China for construction materials increased geometrically such that China currently consumes over 50% of the world’s lumber, cement, copper, steel, drywall, and other building materials. Construction costs are divided approximately 50/50 between materials and labor. Much of what China imports comes from Canada, the U.S., along with South America, Australia and Africa.  China’s material costs are the same as what we pay in America plus the cost of transportation.  If Chinese labor were free, they would have about a 40% edge in construction costs. The material market is now international and dominated by China, not the U.S.; more on this later.


Ten Million Underwater


Single-family housing starts fell from 1,715,800 in 2005 to 108,900 in 2009, and rose to 430,000 in 2011. According to Forbes magazine, as of August of 2012 there were ten million homeowners underwater and 1.5 million in shadow inventory.  According to the U.S. Census Bureau, there are ten million empty houses, not including seasonal (vacation) homes.  Fannie and Freddie funneled large blocks of REO houses to insider investors.  Large blocks of REOs are mysteriously being sold to the same groups of investors by real estate brokers who handle REOs for the banks.  These houses are then flipped for a profit.  The current lack of inventory is causing s mini-frenzy among house buyers.  But these are lower end houses.  Anecdotally, there is one lot in Rancho Santa Fe which is for sale for $695,000 which was listed for sale at $2,500,000 in 2006.  Five-acre lots in La Cresta which sold for $650,000 in 2006 are selling for under $100,000. Houses in these areas are selling for 40% of their 2006 value.  If the land were free, a completed 5,000-square-foot house would cost twice what an REO is selling for.


There are several government programs which affect the affordability of constructing new houses.  The government decided to throw money at housing because you cannot export those jobs.  The Home Affordability Modification Program subsidizes banks for reducing the principal amount owed on houses.  This subsidizes those who were profligate in their purchases and made bad decisions.  So what is your neighbor who is upside down and making payments likely to do?  Quit paying the mortgage.  What is the responsible person who paid a large down payment or paid cash for a house going to do?  He’s going to subsidize the fool, but most of those fools have lost their houses even after a modification.


OSHA Obstacles


The Fed is giving the banks 0% money.  Mortgage rates are the lowest they have ever been. This encourages the purchase of existing houses and new construction, but it can’t continue.  The only reason large public home builders can take advantage of this is because they purchased developed lots at 20% of development costs (i.e., land was free) during the recession.  But the number of new house sales is still less than 25% of the peak.  They have gotten “cheap” down to a science and have enormous efficiencies, such as production line-type methods in labor and bulk material purchases.


After Arizona Gov. Janice Brewer wagged her finger at President Obama, hundreds of OSHA inspectors were sent from the Northeast to Arizona.  Builders now had to scaffold any wall over six feet high.  Every single-story building needed complete scaffolding for stucco.  The scaffold was actually in the way. Anyone ascending a ladder needed someone else to steady it. Labor costs rose 15%.  Beware the government.


FHA gives loans with minimal down payments.  This encourages home purchases, but increases the likelihood of foreclosure.  It subsidizes one industry at the expense of others.  It creates false demand, and yet new construction is still moribund. CEQA and NEPA create enormous costs and time delays (time is also money for) for environmental reports.  In the last six years, the federal government has paid environmental groups $4.6 billion in legal fees to sue ourselves.  When the existing completed lots are exhausted, the price of completed lots will quintuple, and there will be time frame when they will not be available.


China’s Bubble


China’s consumption has increased demand manyfold. It has built a system of bullet trains which don’t produce enough income to pay operating costs, let alone the billions of yuan interest on the bonds.  They have created cities with over a million residential units which are 10-15% occupied. Their buildings decay at incredible rates and collapse in earthquakes because of shoddy materials and building practices. There are enough see-through buildings to satisfy demand for 20 years.  Nobody and no country can expand at 11% compounded for twenty years without paying the price. Carlo Ponzi’s scheme lasted a year.  Madoff’s scheme lasted almost 30 years.  The USSR lasted almost 60 years.  When will China’s bubble burst?  Who knows?  When it does, materials should decrease about 50%.  Construction labor has decreased up to 50% in the last 3 years.  At that point, buyers will be paying about a 10-20% premium for a custom home as opposed to a tract house.  And I may be able to quit practicing law, which produces nothing, and drains productive capital from the system, and go back to my passion.  I’m sure you all need a house like the ones I design and build – if the feds and California Prop. 30 don’t suck you dry.




[Click here for a free trial subscription to Rick’s Picks that includes access to a 24/7 chat room and the recently launched ‘Harry’s Place’.]


Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
samhell's picture

I was a custom homebuilder until last year and I think you subs got it wrong. I was a building GC (we did anything wood, subbed the rest) All the subs got paid by me, in full, and often before I got paid. Any glitches, overruns, unforseeables, were born by myself. The subs came, did their thing, got paid and left. Any problems were left for the GC to take care of. If I ever went back to that business, I would specialize and be a happy sub. I will say that we didnt hammer subs on price, because quality costs money, and the good ones are usually pretty close in price anyway. We always chose subs based on service.

Oldwood's picture

I don't know how you do it but I'm forced to sign a 30 page contract that clearly states that if I don't get paid its tough luck. Plus i have to sign waivers preventing me from pursuing money through leins. Further, few will pay any up front deposit allowing  only a draw on materials which at best shows up 30 days after request but usually is more like 45-60 days. If you don't get your check when promised, they tell you that the form wasn't filled out properly or some crap. And I have heard of no GC's going broke because of a sub, but there are plenty of subs murdered off because GC's and the client have delayed payment for sometimes over a year. I do realize that there are some small contracters that operate less "legal" but virtually all the big ones make sure they have your testicles firmly in their grasp before you even get started. I have no idea how a home builder can survive with the home prices held down by foreclosures, but those costs are ultimately laid on the workers backs. Our industry is just a micro of the rest of the world, where small and midsize businesses are being crushed by market dominating firms and those willing to work underground. People don't understand how many "contractors" are illegals themselves and because most homeowners do not file 1099's, will work on a cash basis. They work under false documents, cash checks and pay in cash. Follow these guys around and they have a roll of cash in their pockets they pull out. You can't compete with that. They can pay their help higher wages because they pay none of the taxes, plus the employee pays no taxes either. I have never heard of an illegal being audited and if the Feds coming looking they just fade away, reappearing under a new banner. Legitimate, playing by a moral code business, is over.

samhell's picture

I got tired of the race to the bottom
and since '08 the handwriting has been on the wall for vacation/2nd home building in my area.
Another problem was sole proprietor subs who were not required to carry workmans comp in NYS.
But come audit time, I'ld have to pay 15%for them anyway
God forbid you forget to work that little extra
into your original bid price.

TideFighter's picture

So, buy a lot now while prices are kept low by insider bank reo deals to developers, then build your house later when labor rates are way down? 

ebworthen's picture

Good stuff Rick, thank you.

Straightforward, no nonsense, well written and cogent thoughts from Mr. Siggard.

Brings to minds the chart of dominant currencies over the years; Franc, Pound, Dollar...Yuan?

The majority of housing is in secular decline.  It will either be big McMansions or multi-family units (apartments).

The West is in post-industrial post-service post-information society decline.

torabora's picture

We get it ...good and hard.

steve from virginia's picture





One of the most unreadable, incoherent articles about anything on the Internet!

DavosSherman's picture

It had an interesting thread pattern to it---I won't argue that.  

But it wasn't a piece of shit.  It wasn't the clueless crap that ilene cranked out on gold from some gold and currency clueless dickhead whose bio reads:

From casual investing, starting in 1977, he devoted more and more time to equity research. In 1987 he made a full-time career switch by joining Merrill Lynch. Over the next 13 years he also worked with A.G. Edwards, Wheat First [now Wachovia Securities], and Ferris, Baker Watts. 

I'd link to it but either the Tylers came to their senses or ilene didn't like hearing the reality from me.

The last 8 months I've seen a massive change on ZH.  Some good.  Some I just don't get.

DavosSherman's picture

The gooberment is a mess.  I'm doing a $24 million dollar proforma for a developer/bank and the county gets an extorsion rate per every lot it divides out.

The gooberment and the banks make more than the developer, the land owner and the builder.

This shit is totally fucked, like the scaffolding.

Central Bankster's picture

In Soviet USA.... the regulators pretend that regulations make things safer, and we the workers pretend to follow them.

eatthebanksters's picture

How long will interest rates stay down without inducing runaway inflation?...inflation happens and the lower and middle classes are locked out of purchasing homes or interest rates rise and destroy the fragile home market taking the economy with it.  The bill has not yet been paid and it must be paid before things heal and get back to normal.  As the battle for who gtes what slice of the pie continues, there has been no agreement by all to share the bill and the pain that comes with it.  Politicians will never fix this problem...it will get worse until we face the same calamity as Greece however without the benefit of someone to slow down our demise with bailouts.  The day of reckoning is coming, it may be later than sooner, but it is coming.  

otto skorzeny's picture

a douche-nozzle that builds massive phalluses for other douche-nozzles. I hope these things are surrounded by moats and pillboxes because when the shit goes down these palaces will be magnets for the hungry unwashed masses. fucking disgusting.

lasvegaspersona's picture

otto....class envy much? Tell us otto...what would be fair? hmmm?

Oldwood's picture

There are a lot of "fucking disgusting" things out there but people who have earned their wealth legally and honestly are not one of them. What is truely disgusting is envy and sloth. Those unwilling to bust their ass  anymore than bitching online yet hate anyone who has more than they do. You are part of Obama's revenge.

percolator's picture

Jesus Christ, you're a naive FN mother fucker.  


What about "STOLEN" from the tax payers?


This is a fact, stop sucking the cock of your false demigod.

willwork4food's picture

You seem to have an obsession about sucking cock dude. Perhaps you need to get it done and get your GED and get it over with.

Oldwood's picture

So all wealth is stolen? you're not just naive but stupid. Just because you never got your shit together doesn't make everyone who did a fn thief. I'm sick to death of every lame ass too lazy to start their own business cause it cut into their beer money and topless club hours. Most people aren't even tax payers these days. The only thing they are losing is their freedom because of their love of spending every damn dime they have on useless crap that's worth about 12 cents when they unwrap it. If you don't like what you have, go make something. Work 80 hours a week and drive the piece of crap so you can invest in yourself. There is always going to be someone with more and some of those will be crooks and thieves but that doesn't mean all or even most are. Quit being a loser pussy screaming "I WAS ROBBED" everytime a bentley rolls by!

cynicalskeptic's picture

The financial sector has gone from 8% of GDP to over 40% in 30 years.   You really think they're creating any real value anywhere?  AT BEST the financial sector helps get capital where it can be most productive - problem is that they've figure out they can make FAR more money manipulationg markets and looting productive enterprises.  

The obscene amounts of wealth you see at the very top aren't coming from making a better product or filling a real need  - real capitalism is dead.  The real money comes from gaming the system - 'legally' or illegally. 

tongue.stan's picture

In California, there seems to be a flurry of activity as a whole bunch of reos are getting spruced up by out of work contractors hired by I guess the banks and re brokerages. In anticipation of a sudden crush of demand? a sudden influx of foreign money? to beat out the gazillions of people who have been just waiting for the best moment to sell? I have no answers because I have no connections, but something is fishy, something is up, and I would bet it's the muppets who will once again take it in the shorts.

percolator's picture

What's your passsion Wayne?

Sucking the cock of people's vanity?

willwork4food's picture

Wtf is wrong with advertising a quality job to people that can afford it?

What are you, 14?

QQQBall's picture

Talked to my framing buddy in lake tahoe. He is good; but his work is spotty and when he does work the wages suck.  He drives a big deisel truck and the deisel price is killing him "just to leave the house."

otto skorzeny's picture

the wages suck because the Mexs that the Dems let in for the votes/Repubs let in for the cheap labor is forcing everyone to lowball the shit out of their bids.

willwork4food's picture

Yup. Don't blame the Mexs for trying to feed their family and get US govnmt assistance. Blame goes to the dicks in white shirts & ties in DC. Your tax dollars @ work 4u.

Cultural Capital's picture

Months ago ZH ran a story on how the net wealth of 20 somethings was about $3,000.  This immiserated generation has no chance at home ownership in the future. They can afford an Iphone, but that is a refection on the weakness of the economy.  Also, when one considers that it is the banks and the boomers who own the majority of rental and housing stocks, who is going to buy these houses in the comming years with no money down?  Housing has no where to go but down.  

Not to mention you will be able to build a house in 20 hours soon: 


Central Bankster's picture

The average wealth of 30 somethings isn't going to be much higher either.  The real problem is that incomes are stagnate, upward mobility low, and unemployment high.  All those 2nd homes, cabins, rentals are going to lose a lot of value when they are some day marked to the reality of this depression (for the young).

Zer0head's picture



Ego and prestige have always been factors for me, along with being a fanatic about architecture.  Despite going to a top law school and working for ten years as an investment banker, I was one of those fanatics and made my passion my business. But the market might be so decimated for the next ten years that it will appear virtually non-existent.  Even if the land were free, you could lose your shirt building a spec house today. (I am also a dink)

Yes_Questions's picture



I am in the business of construction.  I can attest the "Owners" are doing just fine and are having mansions built all over the country for themselves their kids and their minions.  $10 Million on up: we are busier than ever in that category.


percolator's picture

I hope they're investing in gun turrets and moats!

Oldwood's picture

Yes, I as well am part of the high end market and it sucks! Sure there are still wealthy people spending money, but don't think for a moment that they are not beating the crap out of everyone for the rock bottom price. If you don't speak spanish it is tough to get a job and low wage rules the day. Large shops are sucking up everything they can find, quality be damned, and most are still not making money. I have held out, resisting the hire of illegals and am one of the only non spanish companies left in my area. There are always a few willing to pay for quality,  but those are fewer by the day. Been in business for 26 years but doubt many more. GC's always make money though because regardless of how crappy the work is, they always get their cut, even when th esubs don't get paid. Owners hire GC's specifically to screw the subs and now they really put the screws on. Contracts clearly state that even if the GC is paid, it's not their problem if you don't.

willwork4food's picture

As am I. Quality over doing a superficial half-rate job for a few bucks lower. As I'm sure you've seen lately the shit that we lost bids to is amazing.

One thing I usually insist on, ESPECIALLY from a GC, is get half down. Fuck 'em if he says no. That's a red flag.

Oldwood's picture

It used to be that most contractors would get maybe three bids and typically choose the middle. Now they get up to ten bids and seem to always go for the bottom. Some numbers I see are less than my materials. You don't know if they are stupid or just desparate for any cash flow. The one thing I do know is as with foreclosures, regardless of the finished quality of the job or even if the sub goes under before done, their low price is the "new normal". And there are plenty of red flags. We have lead times and go from working like mad to standing around, looking at each other. BUt hey, at least we have a clean shop and spend most of our time polishing the equipment. I want an auction I can be proud of!

economics9698's picture

In Florida we are down 47% for our industry.  We all sit around in conference rooms begging the local government for contracts.  There are a few private housing developments here and there but maybe 25% or less of what it was.  The demand for illegal cheap labor has skyrocketed as those few remaining clients look to lower cost. 

Most of the builders are not as sophisticated as Ackerman about low interest rates, moral hazard, and the Feds role in this disaster.  Kudos to Ackerman.

Those of us in the 47% pushed out f the industry are forced to fight for whatever jobs we can get, move, go back to school.  I have run across more than a few former construction workers hoping to ride this out with student loans and living off the wife.

Like the author I intentionally choose to do construction over banking, finance, or other industries because there is a feeling one gets when you are a part of a team that created something much larger than yourself.  The feeling of being free and outdoors.  I loved it for many years.

Today political correctness, (Robert Reich-“I am concerned… that these [stimulus-created] jobs not simply go to high-skilled people who are already professionals [why isn't clear] or to white male construction workers…” government workers check contracts for the right mix of blacks, Hispanics, women, at the expense of white men.  If you give any indication that you are a Republican the government goon squads will show up on your site talking trash trying to get politically incorrect workers to say something stupid so they can eliminate those workers from the job site.

The industry kisses the governments ass because there is very few options.  Fascism 101. 


Oldwood's picture

I too chose construction over living in poverty in the Ozark hills. I might have chosen poorly.

DavosSherman's picture

Unmitigated disaster!

economics9698's picture

"After Arizona Gov. Janice Brewer wagged her finger at President Obama, hundreds of OSHA inspectors were sent from the Northeast to Arizona.  Builders now had to scaffold any wall over six feet high.  Every single-story building needed complete scaffolding for stucco.  The scaffold was actually in the way. Anyone ascending a ladder needed someone else to steady it. Labor costs rose 15%.  Beware the government."


Fascism 101.