A new report by BuildZoom, the technology company that provides client- contractor matching services, recently released a report analyzing national construction costs using data from its national building permit database and the RSMeans Construction Cost Indexes. The report, written by BuildZoom’s Chief Economist Dr. Issi Romem, identifies the sources driving the steep rise in home construction costs over the past decade. According to the report, construction costs have risen 23.6 percent since 2004.
Lumber and Labor
Of all the factors that contribute to the economics of housing, the cost of building materials and labor has inflated the cost of construction since the mid-2000s. While the report suggests that the cost of goods initially drove up the cost of construction beginning in 2004, that trend was eclipsed by rising wages in the construction labor pool. In the San Francisco Bay Area, a notoriously costly region, wages grew 32.8% faster than material cost over the past 10 years.
A Gap in Reporting
While the report offers a solid regional breakdown of costs, it fails to scratch deep enough at the factors influencing wage growth. It only goes as far as to say that the appreciation in labor costs is likely related to generally tighter labor markets. Put more acutely, fewer skilled workers in the labor pool increase the value of those already in the industry. U.S.News reported just this year an average of nearly 4% wage growth between May 2017 and May 2018, driven by the labor shortage. The BuildZoom report does acknowledge the obvious and significant condition that a “tight” labor market creates on costs, though. “Higher labor costs reduce supply of new homes”, writes Romem. So long as demand for housing stays high, both construction costs and home costs will continue to sky rocket. California is the perfect case study for this condition and it’s creating a real-estate crisis. One has to speculate that a solution for more balanced housing economics lies in the home building industry’s ability to meet demand with a more robust labor pool.