Why New Home Construction Costs Are Rising

Why New Home Construction Costs Are Rising

For home builders, construction costs continue to rise. Here’s what’s causing the increases and what builders can do to help mitigate lost revenue

One of the biggest ongoing concerns for home builders is the rise of construction costs in new home construction that impact their hard-earned businesses. With labor shortages, rising wages, and increasing costs of materials, it can be difficult to profit on new homes.

What follows is a look at what’s causing the rise in cost, how it’s impacting the home building industry, and what home builders can do to mitigate any loss of revenue.

Causes of rising new home construction costs

Home builders may continue to see increases in expenses throughout 2019, which could make it harder to profit on a new home, especially lower-priced homes. Since 2004, construction costs have risen 23.6 percent, according to a BuildZoom report. The site says that this increase has been due to both material and labor costs.

Labor costs

The BuildZoom report also showed that construction costs are highest in coastal cities, and especially in more remote cities like Honolulu and Anchorage. While both material and labor costs contribute to the overall increase in building costs, material costs are pretty even across the board, while labor costs can vary significantly based on location.

A labor-related cost increase has come about because, in these more expensive coastal cities, construction has been focused more on renovations rather than actual new construction, leading to labor cost appreciation that rises significantly higher than material costs. Renovation projects are commonly more labor-intensive than new home builds. These rising labor costs can then actually decrease the supply of new housing and put more pressure on labor costs.

Another issue that drives up costs is the shortage of skilled workers to complete construction projects. As Curbed said, labor shortages can increase wages and overall costs for home builders.

A recent survey conducted by the National Association of Home Builders (NAHB) showed that the biggest concern for builders in 2019 is labor shortages, as four out of five builders said they would continue to face significant challenges around both the cost and availability of labor this year.

Material costs

The second most pressing concern for builders in the NAHB survey was material prices. As the current U.S. administration puts increasing pressure on trading partners, construction costs could continue to rise. Tony Callahan, president, and CEO of Callahan Consulting Group said that changes in construction material prices had the biggest impact on the price of homes in 2018, according to Builder Online.

Data from the Associated Builders and Contractors (ABC) revealed that material prices rose nearly 10 percent year-over-year in mid-2018 and that the cause of this change is because crude petroleum rose 49 percent, iron and steel rose 14 percent, and softwood lumber rose 23 percent last year.

Recent data from ABC in April 2019 showed that the biggest increases on a monthly basis were crude petroleum up 15.3 percent, unprocessed energy materials up 7.3 percent, and nonferrous wire and cable up 2.5 percent. Steel mill products, prepared asphalt products, and natural gas increase the most year-over-year from that latest report.

Additional trade-related increases have come from a 20 percent increase of the Canadian lumber tariff and a 10 percent tariff on Chinese imports, which have impacted construction companies in the U.S., according to Engineering News-Record.

A chief economist with the NAHB said that “these cost increases, coupled with rising interest rates, are putting upward pressure on home prices and contributing to growing affordability challenges.”

Impacts on the home building industry

These rising costs may limit the amount that both the housing and remodeling industries will grow in 2019, according to economists who attended the International Builders’ Show in Las Vegas in February, who think that gains will only be modest.

Aside from rising labor and construction costs, issues for the construction market include:

  • shortages of buildable lots
  • slow growth in construction-loan activity
  • harsh regulations
  • lumber and material tariffs

The NAHB expects housing production to rise 0.8 percent in 2019, up to 1.27 million units.

Overall economic growth in 2019 is expected to slow due to mounting foreign trade issues, rising interest rates, and other factors, according to NAHB analysts.

What can home builders do?

As costs may continue to rise throughout the year and beyond, builders may have to start getting more creative with ways to save on building projects.

Professional Builder says there are two main ways for builders to reduce direct costs: better preparing construction documents and value engineering.

Regarding construction documents, home builders can make things like drawing formats, notations, and detailed plans standard. This can streamline processes and documents and keep track of which products are readily available.

Value engineering involves reviewing and updating plans, including a cost and construction detail analysis of each project. For example, value engineering involves reviewing each and every design component to see if some are nonessential or if less expensive substitutions can be made for certain materials.

If significant cost-efficient strategies aren’t enough to address losses from rising costs, builders may also need to readjust business plans. The first step could be analyzing cash flow and updating the business model.

To discuss your business plan, get in touch with No Boundaries Advisors. Our team of experts will ensure that you create a plan that’s sustainable and can assist with a variety of financial services. Contact us today to schedule a profitability consultation.