Adobe Stock/fotomek

According to NAHB’s chief economist Robert Dietz, home builders face “the five L’s,” also known as labor, lots, lending, lumber, and local regulations, when it comes to current challenges in the industry. In a recent study, Buildzoom’s chief economist Issi Romem focuses on two of the L’s, labor and lumber, to assess how construction costs have risen in recent years. Check out his findings below.

Construction costs have risen substantially since 2004, to the tune of 23.6 percent. Historically, real construction costs increased by 44.7 percent from 1950 to 1975, as wages in the industry improved, and then fell by 13.4 percent from 1975 to 2004 as inflation rose faster than both labor and material costs.1 The rise since 2004 was primarily driven by material costs in the first few years, coinciding with the run-up to the 2000s housing boom, but more recently it has also been driven by labor costs.

The differences in material costs are so much smaller than the differences in labor costs because materials are a tradable good, whereas labor is not. Goods that can be traded across locations tend to converge towards a common price everywhere. Of course, discrepancies can persist inasmuch as prices are driven by the cost of transporting the goods, but otherwise, they tend to be similar everywhere. If they weren’t, whoever was selling the goods at a low-price location would be compelled to sell some of their inventory in a higher-priced location, raising the cost in the former and reducing it in the latter until the prices net of transport costs equalized between the places. Construction materials, despite their bulk, are no match for today’s advanced logistics, and they fall squarely in the category of tradable goods. The wages of construction workers, on the other hand, vary by location and are influenced by the cost of living and the different labor market conditions in each city. Despite the relative ease of geographic mobility in the US, most people remain in their state of birth–especially those without a college degree. Moreover, when workers migrate their compensation tends to shift as well.

Read More