5 factors drive homebuilding costs — and every single one is squeezing builders right now
Building a home is a complicated business.
Despite the shortage of housing in the U.S., it’s been challenging for builders to quickly ramp up production to meet demand.
That’s because of a variety of factors — from navigating lumber tariffs to a shortage of labor. And with interest and mortgage rates rising, on top of inflation making building materials more expensive, homebuilder sentiment has plunged, as would-be buyers take a pause.
To illustrate the five key drivers that influence homebuilders, the National Association of Home Builders’ chief economist Robert Dietz shared a list of the “5 L’s” of homebuilding with MarketWatch.
Labor. It’s tough to find construction workers. So much so that one Harvard expert said the solution to fixing the shortage was to entice more women to join the construction sector, and to reform immigration laws so more immigrants could get construction jobs, too.
Lending. Interest rates affect homebuilders’ and developers’ borrowing costs. And with the Federal Reserve hiking rates four times since March, that’ll increase expenses for builders, on top of homeowners.
“Higher rates affect supply and demand,” Dietz said.
Lumber (and other materials). Lumber prices remain elevated. They’ve been on a wild ride over the last year, hitting new highs and then plunging sharply. But overall, the increase in softwood lumber prices have added $14,345 to the price tag of the average new single-family home, the NAHB estimated in a blog post, and $5,511 to the market value of an average new apartment.
If you’re renting, your household’s paying an additional $51 a month in rent for your new apartment, thanks to lumber.
Laws. Regulations— from zoning approvals to fees to labor requirements — can also add to builders’ costs. The NAHB in May estimated that regulations imposed by the government added roughly $94,000 to the final price of a new single-family home built for sale.
There’s also the issue of NIMBYism, where locals resist new development for fear of increased traffic, pollution and other concerns, which also limits where homebuilders can start new construction.
Lots/land. Lastly, builders need developed lots to build on, but there’s been a shortage of that. Last October, in an NAHB survey, 76% of builders reported that the overall supply of developed lots in their areas was low to very low, which was an all-time record.
In its July survey of builders, the group also found that 13% of builders said they were cutting home prices in June to bolster sales, or to stem the flow of cancellations.
Comments