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Wednesday, May 29, 2024

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Explaining the Rise of Construction Costs

Source: https://pxhere.com/en/photo/182913
  • After falling or remaining flat for three decades, real construction costs have increased sharply since the mid-2000s. The rise was driven by both material and labor costs.
  • Construction costs are lowest in the South, and are highest in the expensive coastal cities and in remote locations like Honolulu and Anchorage. Material costs vary relatively little across cities, but labor costs differ substantially and account for the bulk of geographic variation in overall cost.
  • Over the last decade, the mix of construction work in some of the expensive coastal cities has shifted away from new construction and towards renovation, which tends to be more labor-intensive. Alongside faster overall wage growth, the shift has resulted in labor cost appreciation in these cities outpacing that of material costs. In contrast, labor and material cost growth in the South has been more balanced.
  • Rising labor costs can fuel a vicious cycle whereby costly construction dampens the supply of housing and exerts even greater upward pressure on labor costs (in several distinct ways).

The housing market appears to be reaching a cyclical peak, with falling home sales suggesting that already-slowed price appreciation may soon turn negative. Yet even now, residential construction still hasn’t recovered to its average historical levels. Rob Dietz, Chief Economist at the National Association of Home Builders, summarizes the headwinds confronting homebuilders as “the five L’s” of labor, lots, lending, lumber, and local regulations. Although lots and local regulations pose the most fundamental challenges to new residential construction, and as lending is finally sorting itself out (the way it tends to ironically at just the wrong time), this study is focused on direct construction costs, which comprise the two remaining L’s of labor and lumber.

To what extent have construction costs risen in recent years, and how do they compare to historical trends? How have material costs fared relative to labor costs, and how has this played out in different parts of the country? This study uses publicly available data as well as construction cost data published by R.S. Means and data from BuildZoom’s national building permit database to sketch out some answers.

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