The shifting landscape of home construction costs
|Month||Single-family construction cost index (Laspeyres)||Year-over-year percent change|
From the start of the pandemic through the near end of the crisis in August 2023, the costs of home construction went through the proverbial roof. This was the result of material manufacturing nearly coming to a halt, supply chain disruptions snowballing worldwide and workers becoming all but invisible.
The volatility of lumber is but one stark case in point. The price per thousand board feet — a standard measure of lumber — ranged from a low of $322 in March 2020 to a high of $1,453 in May 2021. By July 6, 2023, it was back down to $530.Footnote2 Today, in response to this volatility, and to the warping and inconsistent quality of wood, some builders have begun to replace lumber studs with metal ones.
What we can learn from the Laspeyres index
In the span of two-and-a-half years — from March 2020 through October 2022 — as is illustrated in the year-over-year (YoY) changes in the Laspeyres Constant Quality Index above,Footnote1 steeply rising material and labor costs nearly vanquished demand for new construction. At various points, potential buyers were told in no uncertain terms that by the time their home was move-in ready, the fast increasing prices could climb another 20%!
But a lot has changed since the fall of 2022. With inflation easing in construction costs, prospects for homebuilders are once again looking up. As we enter the fall of 2023, price growth has dropped back down to the 2% to 3% pre-pandemic level from the 17%+ price inflation we experienced a year ago.Footnote3
While actual construction costs are significantly up from their pre-COVID levels, construction inflation has been easing since November 2022.Footnote3 However, no one can say with any certainty whether construction prices will continue to experience lower inflationary pressures or that some other factor will again disrupt the home-building market in the future.
Home construction costs today
In terms of the impact of COVID-19 on costs, the home construction market is now establishing a new normal.
A Forbes Home article from March of this year asks, How much does it cost to build a house? The basic answer — for an average 2,000-square-foot home using builder-grade materials and including labor — is around $150 per square foot. Or $300,000.Footnote4
This excludes the price of the plot and land development, as well as features such as a garage, deck or basement. Plus, the average price varies by state, region, proximity to metro areas and a host of other factors.Footnote4
Furthermore, when purchase prices go up, as they dramatically did during the pandemic, market forces and self interest typically keep them high. The bottom line is that the purchase price of a newly constructed home, especially with today’s interest rates, will continue to be costly.
In real estate, as in life, nearly everything is interconnected
A July 2023 report from The Wall Street Journal announced that homebuilder stocks are booming. The primary reason cited is a shortage of existing homes for sale. This is partially due, as you’d expect, to many current homeowners staying put to enjoy the financial benefits of the low mortgage rates they locked in during the pandemic.Footnote5
Compared to May 2019, there were 43% fewer existing homes for sale or under contract in May 2023.Footnote5 In other words, the Federal Reserve’s aggressive rate hikes have slowed the housing market, which is dominated by the resale of existing homes.
As a result, homebuilders are the primary beneficiaries. According to the WSJ article, the top three publicly traded builders have seen their stocks rise in May by 30% to 70% since the start of this year.Footnote5
Consider too that home building is not evenly distributed across the country, but is strongest in lower-cost states, especially in the South. Recent worker migration (based on the newfound opportunity to work from home, especially where it’s most affordable) and corporate relocation have created thriving job markets in Texas and South Florida.Footnote5
The impact on your clients
In May 2023, although new-home sales were up 20% YoY, existing home sales were down 20% YoY.Footnote5
Unfortunately, from the perspective of your clients, the stabilization of new-home construction costs does not translate into purchase prices dropping to anywhere near as low as what they were in early 2020. Markets will always bear the price someone is willing to pay for a product or service — and home buying is no exception.
Millennials and now the older Gen Zers are itching to buy their first homes. Baby boomers who have paid off their mortgages, or are about to, are also looking for new, downsized homes — including in 55+ communities — with little or no maintenance. But there is still a national shortage of homes on the market, and builders cannot build new homes fast enough. The closer the relationship you can establish with builders in your area, the more your clients will appreciate your services.
1 U.S. Census Bureau and U.S. Department of Housing and Urban Development, New Residential Construction Price Indexes – Monthly – Single-Family Houses Under Construction, May 2023 Release. Accessed June 30, 2023.
2 Lumber Prices - 50 Year Historical Chart, Macrotrends, June 30, 2023. Accessed June 2023.
3 Description of Price Indexes for New Single-Family Houses Under Construction, United States Census Bureau, U.S. Department of Housing and Urban Development, November 30, 2022. Accessed June 2023.
4 How Much Does It Cost To Build A House In 2023?, Forbes Home, Rachel Abraham and Corinne Tynan, March 25, 2023. Accessed June 2023.
5 Home-Builder Stocks Are Booming as Homeowners Stay Put, The Wall Street Journal Online, Amina Niasse, July 6, 2023. Accessed July 2023.
MAP5821959 | 08/2023