Since many on this site may be buying or selling a home at any given time, own investment properties, or commercial real estate I'm posting this weekly update to stay current.
The data is well researched from my employer New American Funding's Research/Analytics Department.
Thus, it is fact based and only analyzing the data/trends without regard to government policy.
As I stated previously let's keep the thread informational for those that might be in the market and leave policy discussions in "The Corral".
Great timing for this data with the recent home-building and remodeling threads.
The Highlights -
What Construction Costs Reveal for the New Home & Remodeling Markets
Quick Hit
Inflation, it’s the hot topic that we hope will go out of style but seems to want to make a comeback just like baggy pants and oversized t-shirts (not a fan personally). Before losing your attention with yet another inflation update, stick with it, because this time we’re analyzing inflation from the perspective of costs to producers of products via the often-overlooked Producer Price Index (PPI).
Producer Price Index (Inflation) and What It Means for Housing Costs
Unlike the well-publicized CPI and PCE inflation reports that measure the final price realized by consumers, the PPI report takes one step back and determines the change in output prices faced by producers. This allows PPI to serve as a leading indicator for CPI, because when producers are faced with input inflation, those rising costs are passed along to the retailers and eventually to the consumer.
The latest report reveals a potential reacceleration of inflation and is indicating that pipelines could be coming under pressure and keep inflation elevated. In March PPI climbed 2.1% on an annual basis, representing the biggest gain since April 2023. To make matters worse for the housing industry inputs to residential construction increased for the fourth consecutive month to a new high and is seeing faster growth than 2023 after it posted growth of 2.22% annually.
Breaking things down into various categories we can see that building material prices for things like softwood lumber (ideal for house framing) and gypsum (ideal for walls and ceilings) have started to pick up and will likely continue to do so as single-family home construction enters the spring season and demand for lumber increases.
Additionally, ready-mix concreate rose 6.9% annually, while we’ve seen a bit of a reprieve in steel mill product prices. Putting these indicators together tells us that construction costs to build a home is likely to remain a going concern on homebuilder margins and ultimately end up increasing the costs that homebuyers pay when new housing construction supply hits the market.
Wages Add to New Construction Price Pressures
Adding to inflationary price pressures in the housing market are residential building workers’ wages. According to the Bureau of Labor Statistics, wage growth accelerated to 6.2% in February, well above the 4.1% annual growth rate for employees on private payrolls, and has been trending up for the past eight months mainly due to an ongoing skilled labor shortage in the construction market that continues to challenge the sector.
Taking the growth in prices for the aforementioned building materials and rising wages into consideration, it’s likely that the below depiction of the average cost to construct a new single-family home will only become that much more costly. An interesting note from the National Association of Homebuilders “Cost of Construction Survey” tells us that construction costs account for 60.8% of the average home sale price and profits only represent 10.1% of the total. When homebuyers look for deals on new construction this spring let them know that homebuilders aren’t happy with the cost either
Existing Homeowners Pull Back on Remodeling Activity
Of course, current homeowners aren’t immune to rising building material and costs either, especially if projects are being financed in the current high-rate environment. Spending on homeowner improvements and repairs is projected to slow by over 7% in the third quarter of this year before easing to just -2.6% through the first quarter of 2025. However, spending is projected to remain well above historic levels as owners doing the financial math will likely conclude that it makes sense to spend-to-stay instead of spend-to-sell. If you’re spending to stay, you’ll likely reach for that more expensive upgrade and if that expense reaches $50K or more, you’ll likely be tapping into you historically high level of home equity.
The stabilization and continued appetite for remodeling despite an increasingly uncertain economic environment is one reason homebuilders are still net positive on the remodeling market. Robert Dietz, the NAHB’s chief economist, said “one potential area of growth, given the aging U.S. population, is aging-in-place remodeling. In fact, 63% of remodelers reported in the first quarter doing aging-in-place work, with bathroom projects like grab bars and curb-less showers being particularly common.”
If you find yourself falling into the remodeling camp, “Remodeling by JLC” provides some helpful data showing what you can expect from an ROI standpoint.
Have an AMAZING WEEK!!
MH
The data is well researched from my employer New American Funding's Research/Analytics Department.
Thus, it is fact based and only analyzing the data/trends without regard to government policy.
As I stated previously let's keep the thread informational for those that might be in the market and leave policy discussions in "The Corral".
Great timing for this data with the recent home-building and remodeling threads.
The Highlights -
What Construction Costs Reveal for the New Home & Remodeling Markets
Quick Hit
Inflation, it’s the hot topic that we hope will go out of style but seems to want to make a comeback just like baggy pants and oversized t-shirts (not a fan personally). Before losing your attention with yet another inflation update, stick with it, because this time we’re analyzing inflation from the perspective of costs to producers of products via the often-overlooked Producer Price Index (PPI).
Producer Price Index (Inflation) and What It Means for Housing Costs
Unlike the well-publicized CPI and PCE inflation reports that measure the final price realized by consumers, the PPI report takes one step back and determines the change in output prices faced by producers. This allows PPI to serve as a leading indicator for CPI, because when producers are faced with input inflation, those rising costs are passed along to the retailers and eventually to the consumer.
The latest report reveals a potential reacceleration of inflation and is indicating that pipelines could be coming under pressure and keep inflation elevated. In March PPI climbed 2.1% on an annual basis, representing the biggest gain since April 2023. To make matters worse for the housing industry inputs to residential construction increased for the fourth consecutive month to a new high and is seeing faster growth than 2023 after it posted growth of 2.22% annually.
Breaking things down into various categories we can see that building material prices for things like softwood lumber (ideal for house framing) and gypsum (ideal for walls and ceilings) have started to pick up and will likely continue to do so as single-family home construction enters the spring season and demand for lumber increases.
Additionally, ready-mix concreate rose 6.9% annually, while we’ve seen a bit of a reprieve in steel mill product prices. Putting these indicators together tells us that construction costs to build a home is likely to remain a going concern on homebuilder margins and ultimately end up increasing the costs that homebuyers pay when new housing construction supply hits the market.
Wages Add to New Construction Price Pressures
Adding to inflationary price pressures in the housing market are residential building workers’ wages. According to the Bureau of Labor Statistics, wage growth accelerated to 6.2% in February, well above the 4.1% annual growth rate for employees on private payrolls, and has been trending up for the past eight months mainly due to an ongoing skilled labor shortage in the construction market that continues to challenge the sector.
Taking the growth in prices for the aforementioned building materials and rising wages into consideration, it’s likely that the below depiction of the average cost to construct a new single-family home will only become that much more costly. An interesting note from the National Association of Homebuilders “Cost of Construction Survey” tells us that construction costs account for 60.8% of the average home sale price and profits only represent 10.1% of the total. When homebuyers look for deals on new construction this spring let them know that homebuilders aren’t happy with the cost either
Existing Homeowners Pull Back on Remodeling Activity
Of course, current homeowners aren’t immune to rising building material and costs either, especially if projects are being financed in the current high-rate environment. Spending on homeowner improvements and repairs is projected to slow by over 7% in the third quarter of this year before easing to just -2.6% through the first quarter of 2025. However, spending is projected to remain well above historic levels as owners doing the financial math will likely conclude that it makes sense to spend-to-stay instead of spend-to-sell. If you’re spending to stay, you’ll likely reach for that more expensive upgrade and if that expense reaches $50K or more, you’ll likely be tapping into you historically high level of home equity.
The stabilization and continued appetite for remodeling despite an increasingly uncertain economic environment is one reason homebuilders are still net positive on the remodeling market. Robert Dietz, the NAHB’s chief economist, said “one potential area of growth, given the aging U.S. population, is aging-in-place remodeling. In fact, 63% of remodelers reported in the first quarter doing aging-in-place work, with bathroom projects like grab bars and curb-less showers being particularly common.”
If you find yourself falling into the remodeling camp, “Remodeling by JLC” provides some helpful data showing what you can expect from an ROI standpoint.
Have an AMAZING WEEK!!
MH
