How Construction Costs Affect the Housing Recovery

Though the title of this particular blog sounds self-explanatory, the economics of how construction costs affect the housing market and the recovery are quite complex.

In a National Association of Home Builders (NAHB) 2011 survey, construction costs accounted for almost 60 percent of the final price of home sales on average. Breaking down the costs from the same survey shows that framing and trusses accounted for 13.5 percent of construction costs, excavation and backfill (9.3), plumping (6), cabinets and countertops (5.6) were the four biggest contributors.

From a logistical prospective, construction costs (above paragraph) are heavily influenced by the price of wood,lumber and drywall and also plumbing and electric wiring. Due to an increase demand on wood and lumber for building supplies in developing countries like China and more energy efficient homes and stricter building codes, the costs of wood, drywall and wiring went up. When this happens, builders compensate for the profit margins by doing one of two things, either raise the price of the homes or build less homes. We are seeing the former happen right now.

Now that the housing market is recovering, tight supplies are driving prices up, however the uptick should be temporary as eventually as building supplies will return to normal.