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Fair And Balanced: Minyan Mailbag On Housing

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Take that Mr. Zucchi !

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Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next column with that very intent.

Mr. Zucchi,

I read your column in Minyanville yesterday and wanted to share my opinion, for what it's worth, as someone who is familiar with real estate both in Europe and in the US.

First of all, I have to say I agree with you: Mr. Toll is probably incorrect in asserting that there's much of a cost gap in housing between the two sides of the ocean, at least at the present time. However, my line of thought to get to that conclusion is a bit different from yours and there are a couple points that you may want to consider in your analysis.

First, while it is true that the Alps are there, it is also true that there's a very large chunk of the US that is away from the coasts. While it is indubitably true that this area would be extremely easy to build on, it's also undeniably true that historically, save for a few very specific areas around major cities, it has never experienced the same housing pressures as the rest of the country. I don't expect this to change meaningfully: as far as Mr. Toll goes, that land may very well be on top of Monte Rosa, it's just as relevant to his target markets.

I would estimate - and mind, this is a very rough estimate - that the higher-end-real estate areas in Europe and in the US are not, percentagewise, that much different, save for the fact that what exists in europe is already much more intensely developed, making large profits for builders/developers more difficult.

As far as house construction costs go, bricks and mortar or, more plausibly, reinforced concrete construction do not really add that much of a cost to a house: most of the cost is in finishing work, especially in the US. This leads us right to labour costs. Labour costs are a little different than you state, in my opinion: a lot of the workers here - like in the US - are immigrants. Couple that with the absence of very large residential builders and you find that strong union pressures are not that relevant. What is relevant is that while unskilled labour may be cheaper stateside, skilled labour for finishes is definitely more expensive. For instance, the cost of a high-quality kitchen, installed, in the US, is larger than it is in europe by a factor of two (that's conservative). The same goes for bathrooms, flooring and almost anything non structural.

What all of this comes down to, in my opinion, is the following: while it may be true that low end housing in the states is cheaper than in Europe (and that is a big 'may' already), at the higher end (where Toll builds, in the 500k - 1M area) I would not be that certain. If we take a further step and discuss the highest end of the market - the over-two-million mark - I can say with a high degree of certainty that costs in europe may actually be lower.

This does not even remotely go into the very difficult issue of quality and durability: there are choices made in the US, even for very expensive houses which are much better built than those mr. Toll offers, that have me very, very, very perplexed. Persuading a builder (mind, a high end builder) that something that will 'certainly last 20 years' and or fibreglass tubs simply are not acceptable has been one of the most difficult fights I had to face in the past couple of years.

Therefore, I would be very careful, were I mr. Toll, in asserting that there's still that much of a gap between europe and the US in his target market. However, I still remain long TOL (and other homebuilders) for a very simple reason: the customers in the states are quite different from the ones in Europe, be it France, Germany or Italy (England is a slightly different matter) and so is the state of the desirable land, as I mentioned. There is much less price sensitivity stateside (both to housing costs and to financing costs - a 5.8% APR 30y mortgage with the cost of money being what it is today is no gift, yet people love it) and a much more efficient financing industry (which in and of itself accounts for most of that lack of sensitivity). This, coupled with the fact that the US still has a lot more 'developable' acreage in desirable areas than Europe does - I am witnessing first hand what's going on in a 'desirable' area of Eastern PA - leads me to believe that as long as rates stay comparatively low the homebulders who are properly positioned will be able to continue to profit. So I remain long.

Minyan Luigi Fabio

Thank you Luigi. I will only add that some would describe "a much more efficient financing industry" as a much more reckless financing industry. But that's for another day.

No positions in stocks mentioned.
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