With the economy on the upswing and with a shortage of homes available on the real estate market, it seems like new-home construction should be booming. While in some areas home prices are rising with homeowners getting above even what they are asking for, eventually when the prices become too high people will simply stop buying these homes.
To solve the problem of ballooning home prices, it would be logical to assume that new construction – which would add more inventory into the mix – would be a no brainer. Yet, with the influx of rising costs in the construction industry, contractors are struggling to build homes that people can afford to buy. This barrier is preventing the wave of new construction that one would expect under the current economic climate.
The rising costs of construction are a result of new building codes, land use, environmental laws and other rules which have upped regulatory costs by 29 percent from just five years ago. Increased costs are also due to a combination of factors including rising tariffs on building materials, the rising cost of the actual materials, and on a nationwide shortage of skilled workers.
According to Block-Lite, a full-service block producer which provides fine masonry products to the construction industry, building material prices rose nearly 9% from May 2017 to May 2018, which is the largest annual increase in seven years. This spike transpired despite an only 4.2% increase in the price of construction for the same period. Construction-related materials that saw a price increase included aluminum mill shapes (17.3%), lumber and plywood (13.9%), copper and brass mill shapes (13.8%), steel mill products (10.5%), diesel fuel (44.5%), asphalt felts and coatings (8.9%), ready-mixed concrete (6.5%) and paving mixtures and blocks (5.2%).
These statistics, provided by an analysis of the U.S. Department of Labor’s producer price indexes, does not even reflect the increased tariff fees, which are significantly driving up prices and consequently stressing the industry.
As a result of the rising costs many new construction projects have been delayed, cancelled or even left unfinished. Currently, suppliers, contractors and prospective home buyers are all existing in an atmosphere of uncertainty, in limbo waiting to see what will happen. In the meantime, construction delays and overrun budgets are the norm.