Rising construction costs are hurting first-time homebuyers

One of the fastest growing segments of the residential real-estate market is newly built homes, which accounted for one in eight properties for sale in September. But rising construction costs have put new homes beyond the reach of many first-time homebuyers, according to an analysis of residential construction by the brokerage firm Redfin.

Driven in part by a shortage of construction workers, the average cost of labor and materials for a new single-family home in August was $240,000 – the highest since at least 1988, when the census bureau began tracking home-building costs. That pushed the average price of a new home to $374,000, some $87,000 higher than the average existing home.

Redfin chief economist Nela Richardson said that while single-family housing starts are up 9 percent from a year ago, the cost of construction means many buyers are priced out of the market.

“This is why even in the midst of extreme inventory shortages for existing homes, new homes are sitting on the market instead of selling,” Richardson said.

The growth in new-home prices has actually slowed in 2017 from a year-over-year rate of 5.3 percent in January to 3.3 percent in September. Existing home prices were up 7.9 percent year-over-year in September, compared to 6.6 percent in January.

Labor costs for home builders have risen as the industry faces a shortage of workers. Employment in residential construction is 25 percent below a peak of more than 1 million workers in April 2006. Analysts expect the shortage to continue as older workers retire and companies struggle to find replacements.

Material costs are also rising. Lumber prices are at a 15-year high, and tariffs imposed by the Trump administration will make imported Canadian lumber more expensive.

Combined, all of these factors have made it tougher for buyers looking for smaller, less expensive homes. According to one analysis, the number of new homes under 1,800 square feet fell by almost 500,000 between 2004 and 2016, and townhome construction last year was half what it was in 2005. IN 2016, just four percent of all new homes were listed for less than $150,000.

“We would love to build more affordable starter homes,” Isaac Stocks, a Seattle-area home builder, told Refin. “But when high-end homes cost the same to build and are far more profitable, we lose the incentive to build smaller units.”