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Will High Building Costs Increase the Price of New Homes?

by Reno Manuele

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Building costs have been rising for homebuilders, especially when it comes to lumber. Will that, in turn, lead to an increase in new home prices?

By Peter Ricci

Housing construction has been posting some of its best numbers in years the last couple months, but some analysts are worrying that mounting building costs could threaten the industry’s momentum.

As the Wall Street Journal recently reported, between lumber and labor, the homebuilding industry has a number of costs to consider heading in to 2013.

Building Costs Rise in Recovering Market

The housing construction industry, the Journal noted, is facing a number of rising building costs, including:

  • The cost of framing lumber, which accounts for one-sixth of total construction costs for homes, has risen 21 percent in the last year, drywall prices have risen 25 percent.
  • One source for the rising lumber costs, as we’ve reported before, is the mountain pine beetle infestations, which are expected to cost the lumber industry a third of its supply over the next 20 years, according to a recent British Columbia Interior study.
  • Builders have also found that labor is a problem; between 2007 and 2011, the construction industry was in free fall, and it shed an amazing 2.1 million jobs in that time; now that times are improving, though, labor has been a bit slower to return.

Higher Building Costs = Higher New Home Price Tags?

Of course, the reason all this statistical mumbo jumbo matters to agents is that homebuilders construct new homes, and if their building costs continue to rise, there’s a mighty fine chance that the costs of new homes will increase as well.

However, though the building costs scenario may look dire, there are two good good signs that this may be a temporary situation. First, industry veterans have noted that supply-demand imbalances are common during recovery phases, and as the housing recovery stretches its legs and becomes more sustainable, costs will go down. And two, building off that point, the supply of lumber was down 45 percent in the first half of 2012 from its peak in 2005, but lumber providers are slowly amping their production – which will also help with costs.

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