from CoreLogic
— this post authored by FRANK NOTHAFT
Sales prices for newly built homes have trended higher since 2012. Prices were 2% higher this spring compared with a year ago, based on new home sales recorded in CoreLogic’s public records. The price rise partly reflects rising costs to build new homes.
Costs associated with purchasing and preparing a lot, acquiring permits and inspections, hiring labor and buying materials account for most of the expense. The National Association of Home Builders has reported that about 60% of the sales price reflects the construction cost of the structure.[ 1]
Materials are a large component of the overall structure cost. The expense of major building materials had been in an upswing through the summer of 2018, fueled by a price runup in the two major components in framing: lumber and steel. CoreLogic’s Quarterly Construction Insights reported that lumber prices had jumped 20% and steel prices were up 14% by September 2018, compared with a year earlier [2] (Figure 1) While steel prices have continued to rise, lumber prices were down 11% by June 2019 compared with twelve months earlier. Because framing expenses account for nearly one-fifth of the construction cost of a house, the drop in lumber prices has helped to moderate the effect of material costs on new home prices.
In contrast, the rising cost and shortage of labor continue to add to construction costs. Worker compensation has risen over the last decade; in the past year, compensation has increased 3%, about double the pace of inflation. (Figure 2) Worker retention has been an issue as well, as some hop to a new job at higher pay. Vacancies as a percent of construction jobs have climbed to the highest level in more than 18 years, underscoring the shortage of workers for the building industry. (Figure 3)
Rising land and labor costs are likely to offset any cost reduction from lower lumber prices in the near term, nudging up overall costs for a new home. Thus, national price indexes for new home sales will likely rise further in the coming year.
Summary:
- Structure cost accounts for 60% of the new-home sales price.
- Lumber prices fell 11%, June 2018 to June 2019.
- Construction worker compensation up 3% last year.
- Job openings rate his highest in 18 years, underscoring labor shortage.
Footnotes
[1] See Carmel Ford, “Cost of Constructing a Home”, December 1, 2017, Table 2; the 2009 to 2017 average was 59.5%. http://www.nahbclassic.org/generic.aspx?genericContentID=260013 [2] CoreLogic Quarterly Construction Insights at https://www.corelogic.com/insights/quarterly-construction-insights.aspx. The eight materials were combined into four categories in Figure 1 using weights from “Cost of Constructing a Home”, December 1, 2017, Table 1, “II. Construction Cost Breakdown”. For example, using the average costs of Framing, Trusses, and Sheathing for Lumber, and the average costs of “General Metal, Steel” for Steel, resulted in Lumber having a 98% weight for the “Lumber & Steel” category in Figure 1.© 2019 CoreLogic, Inc. All rights reserved.
Source
https://www.corelogic.com/blog/2019/09/material-and-labor-expense-drive-construction-costs.aspx
