Prices of materials used in residential construction have been flat or even declined in some cases, providing welcome relief to home builders. But overall, prices of building materials are still far above their pre-pandemic levels, and the impact of those elevated prices can be seen in unexpected places.
Where are Building Material Prices Now?
Earlier this year, NAHB reported that building material price growth slowed dramatically in 2023, in line with slowing inflation in the broader economy. Prices still grew, though, and were still elevated from post-pandemic surges.
“The only major building material to see price recovery is lumber,” said Jesse Wade, NAHB director of tax and trade policy analysis. “At the end of 2023, lumber was trading about 20% higher than in 2019, but with further price declines in 2024, the price is roughly back to normal. This is after surges in 2020-21 that saw lumber prices rise more than 300%.”
For other build materials categories, prices are still far above their pre-pandemic levels.
Gypsum (drywall): Prices decreased 2% over 2023, after increasing 44.6% over the two years ending December 2022.
Ready-mix concrete: The average price of concrete increased 11.2% in 2023 and 10.3% in 2022, combining for the second-largest two-year increase since 2000.
Steel mill products: Steel mill products annual average prices declined 16.1% in 2023 after increasing 8.7% in 2022 and the historic 90.3% increase of 2021. Prices are 31.2% lower than their 2021 peak but remain 65.1% higher than they were in January 2020.
Why Did Building Material Prices Rise So High?
It’s easy to blame the pandemic for all our woes, and it certainly didn’t help building material prices. But material prices were pointed higher long before the first mention of COVID.
Beginning in late 2017 and continuing for most of 2018, building material prices grew more than 5%, mostly driven by trade disputes for materials sourced overseas.
“In the spring of 2020, supply and demand forces took over the lumber market,” said Wade, who continually tracks and analyzes short- and long-term trends in commodities pricing. “Home builders got back to work very quickly, and people stuck at home decided to invest in home repairs, renovations and upgrades. So lumber prices soared. But it wasn’t until early 2021 that other material prices began to rise.”
What Causes the Rise in Material Prices?
Supply and demand: Although lumber was the most sensitive material to demand, other materials quickly followed, and for good reason. There were more homes started in 2020 than in 2019, even with all the lockdowns. The number of homes started in 2021 was a 15-year high. In short, there was high demand for materials in 2020 and 2021.
Broader inflation: When the general cost of goods and services rises across the economy, it inevitably impacts the price of construction materials.
Global factors: Factors such as geopolitical tensions, trade disputes and changes in international trade policies can disrupt supply chains and lead to price instability.
Sustainability initiatives: There’s a growing demand for eco-friendly, sustainable building materials and green practices in the construction industry. Although this is a positive trend for the environment, it can put pressure on costs as these specialty materials often come with a higher price tag.
How Do High Material Costs Impact Housing?
Aside from simply making it more expensive to build — and thus, buy — a home, rising material prices can have insidious effects on the housing market.
Home insurance premiums have soared over the past year. One of the primary drivers of the rate increases is the cost of building materials used to repair homes after claims. Although building material prices have been growing for years, we are just starting to see the impact on the insurance market.
Material cost fluctuations also make it more difficult for appraisals to reflect the true value of the home, because costs are rising too rapidly and builders are having to compensate on the front end of construction by decreasing amenities available in the home. Inaccurate valuations can cause major issues in financing for home buyers.
At a time when mortgage rates and home prices are at multi-decade highs, the rising insurance premiums and uneven valuation environment makes housing attainability much harder.
From building to buying, home prices across the country have soared to new heights. The national average cost to build a house is about $329,000, not including land. That’s for an average-sized house of 2,594 square feet, which boils down to $126 per square foot. This may seem high, but the price to buy an existing home has skyrocketed recently, too. Currently, the median home price in the U.S. is $425,000. While the median list price is down 1% compared with the same time last year, the median listing price per square foot increased by 36% compared with September 2019, while the price per square foot grew by 50.8%.In short, it may cost you more today to buy an old house than build a new one.According to the National Association of Home Builders, the pandemic’s disruption of supply chains has caused lumber costs to remain volatile, though prices have stabilized somewhat compared to previous peaks. Framing lumber that once set builders back about $1,200 per 1,000 board feet is now running around $850, still a significant increase but lower than the highs seen earlier.”The pandemic has been a big source of unexpected shifts in supply and demand for all kinds of goods,” says Danielle Hale, chief economist of Realtor.com®. “As a consumer, you’ve likely experienced this in the form of empty shelves that didn’t have toilet paper or yeast or chicken.” Given that a house is much bigger (and more expensive) than rolls of toilet paper, it’s understandable that new-construction homes, and the materials to make them, are suffering from an unprecedented price increase that has many homebuyers and builders reeling from sticker shock. “This unprecedented price surge is hurting American homebuyers and home builders, and impeding housing and economic growth,” said NAHB Chairman Chuck Fowke. “These lumber price hikes are clearly unsustainable. Policymakers need to examine the lumber supply chain, identify the causes for high prices and supply constraints, and seek immediate remedies that will increase production.”Still, the pandemic alone isn’t to blame for the high cost of building a house. Here’s more on why new construction costs so much, and how it compares with buying a preexisting home. Wondering if it’s cheaper to build a house? First, it’s important to understand that there are a few main costs involved in the construction of a home, says Andy Stauffer, owner and president of Stauffer and Sons Construction. Sure, each time you build a home, costs are a little different, but here are the biggies:Also keep in mind that the cost to build a home can vary widely based on where you live.Now you know the basic cost to build a home, but the expenses don’t end there. Here are a few extra costs you’ll need to be aware of that aren’t factored into the above price:”When the pandemic began to unfold, builders faced the prospect of buyers disappearing,” says Hale. “And while buyers did pull back early on, the housing market quickly did a 180 with buyers coming out en masse to find a better fit at home.” Now, as the economy has opened back up, builders are struggling to balance strong demand with supply chain crunches beyond lumber that are leading to higher prices, causing some homebuyers to hold off on moving forward with new construction. But it’s not all doom and gloom. “I expect that we’ll see new home sales eventually pick up in a more gradual manner as builders work through supply chain challenges and the development pipeline normalizes,” Hale adds.Although it may cost you more today to buy an old house than build a new one, you save yourself the headaches that inevitably come with construction, along with the long wait before you move in.On average, the time it takes to build a house is about six to nine months. Still, building a house does have its advantages. Everything from pipes to the heating and cooling systems will be new. That means no costly repairs in the near future—and so a newly built home could end up costing less in the long run.All in all, it’s smart to weigh the pros and cons of new versus old construction—and the price you pay for construction costs versus an existing home is only the beginning. Here we lay out everything a homebuyer needs to know about buying an existing home compared with building one from scratch or having it built by a general contractor.There are actually two things to consider: the upfront costs of buying versus building, and the ongoing maintenance costs.
If you buy an existing home: According to the latest figures, the median cost of buying an existing single-family house is $355,000. For the average 1,500-square-foot home built before the 1960s, that comes to about $237 per square foot. That said, the exact price can vary widely based on where you live. (Go to realtor.com/local to see the price per square foot in your area.) (Go to realtor.com/local to see the price per square foot in your area.)
If you build a new home: Building a house will set you back an average of $296,652, plus about $35,872 due to the pandemic-related uptick in material costs. But you may get a lot more for your money. For one, new construction is usually more spacious, with a median size of 2,594 square feet—so the cost to build per square foot is actually lower than the cost per square foot of existing homes.Another advantage of having a builder construct a custom home is you pay for only what you want, whereas an existing home may have interior and exterior features (e.g., a finished basement or a basketball court) you’ll pay a premium for, even if you don’t want them. But if an older house happens to be your dream home the way it is, that may be the more bargain-friendly route.Last but not least, by building your own house, you get to design it to your exact specifications. If you have very clear ideas about how you want your home to look, this blank slate could be worth every penny.
If you buy an existing home: Older homes have more wear and tear, which means certain things may need more maintenance—or, if they’re on their last legs, replacement, points out Michael Schaffer, a broker associate at Keller Williams Integrity Real Estate LLC.Naturally, the cost of this upkeep isn’t cheap, so make sure you know the age of the main items. For example, the average furnace is expected to last 20 years and will cost $5,000 to replace. The typical HVAC system lasts 15 years and costs $8,000 or more to replace.Another biggie is the roof: The average shingled roof holds up for about 25 years. If you need to replace roofing, you’re looking at a bill starting at $9,000. Plumbing and septic systems can go for some time without a problem, but when something goes wrong, it’s an emergency.With an existing home, unless you step into a high-end home with everything you want, you may want to start changing things, even if they are still functional. Home improvement shows make it seem simple to change countertops and flooring, or even overhaul floor plans. When you’re paying for material that’s shot up in price recently and labor costs for plumbing and drywall work, you may start to think your total cost might have been less paying a builder for a custom home in the first place.
If you build a new home: Considerably less upkeep is one of the primary reasons to build your own single-family home, because everything from major appliances to the HVAC system is new and under warranty. In fact, sometimes the entire home is protected for up to 10 years because a builder generally offers a construction warranty “for any problems that arise,” says Schaffer. Your interior and exterior maintenance outlay for a decade is potentially zero dollars. That can make up for some home construction costs per square foot that you paid by opting for a custom home.
If you buy an existing home: A major perk of older homes is mature landscaping with large trees and established plantings. That may not seem like a big deal until you consider that the U.S. Forest Service estimates that strategically placed mature trees can add tens of thousands of dollars to a property’s value and save up to 56% on annual air-conditioning costs.
If you build a new home: Builders often do little or no landscaping to new construction. It may take thousands of dollars—and many years—to get the yard you want. For instance, one 6- to 7-foot-tall red maple will cost about $99.95 (if you plant it yourself), which will then grow 2 to 3 feet a year. According to HomeAdvisor, the cost of adding completely new landscaping ranges from $1,400 to $5,700-plus.
If you buy an existing home: The latest U.S. Census found the median age of American houses to be 46 years old as of 2020. Older construction means dated windows and appliances—dollars flying out the window on wasted energy expense.
If you build your own home: Recent construction almost always beats older homes in energy efficiency, says Kyle Alfriend of the Alfriend Real Estate Group Re/Max in Ohio. Homes built after 2000 consume on average 21% less energy for heating than older homes, mainly because of their increased efficiency of heating equipment and building materials. This translates into reduced energy expense every month, even with the higher square footage in many newer homes.”However, often the regulatory requirements on new construction are stricter than existing buildings,” says Hale. “This can mean you enjoy better energy efficiency, but these requirements can also drive up the price of new homes and mean that they take longer to build.”
If you buy an existing home: The nice thing about old homes is that there’s context to your purchase: You can research the home’s previous sale prices, as well as prices of similar homes in the area (known as comparables, or comps) to get a feel for whether prices are rising or falling in your area. If the prices for your home and others in the area have been steadily rising, odds are decent that the trend will continue, which bodes well for you if you decide to sell later on.
If you build a new home: New house construction, particularly in up-and-coming neighborhoods, can be more of a gamble. Without a proven track record of lots of comps, there just aren’t enough data points to really know what could happen down the line. However, some buyers in hot markets are seeing incredibly quick jumps in their new-construction property value.
The cost per square foot of a single-family home declines systematically as the home becomes larger, according to NAHB analysis of two recent data sources. In microeconomics, unit costs that decline as a business operation increases in size are called economies of scale.
In home building, economies of scale may exist in several forms. It is conceivable, for instance, that homes cost less if they are built in larger subdivisions, or by larger companies, where design costs may be spread over a large number of production units. This post, however, focuses on economies of scale at the level of an individual home. In other words, does cost per square foot decline, all else equal, as a home increases in size?
The answer is yes, according to NAHB tabulation of data from the Survey of Construction (conducted by the U.S. Census Bureau with partial funding from the Department of Housing and Urban Development). Last Friday’s post reported on how the sale price per square foot of new single-family detached homes varies across time and geography. The chart below shows how it varies with the size of the home (measured in square footage of finished floor space). It is easy to see that the median price declines systematically, from a high of $200 per square foot for homes under 1,200 square feet to a low of only $132 per square foot for homes with 5,000 square feet or more.
There could be several reasons for this. A conventional explanation is that some components of construction cost—for example, design, regulatory and waste disposal costs—may be more or less fixed and not change much with house size.
The above sale price numbers are calculated after subtracting the value of the improved lot, but do not otherwise control for differences in quality or amenities present in the homes. One of the private services that does carefully control for quality and amenities when estimating construction costs per square foot is RSMeans. The chart below shows the base cost per square foot for a two-story home in each of the four RSMeans quality tiers: Economy, Average, Custom and Luxury.
Within each tier, characteristics of the home (other than square footage) are held constant. The “Average” two-story home, for instance, has a simple design from standard plans, no basement, a kitchen, single full bathroom, asphalt shingles on the roof, wood framing, wood siding, gypsum wallboard interior, and average quality materials and workmanship. As in the previous chart, cost per square foot declines systematically as the house gets bigger. Although the rate of decline varies, at the low end of the size scale, doubling the size of the home reduces the base cost per square foot by somewhere in the neighborhood of 30 percent. Interested readers may consult RSMeans for further details.
The bottom line is that economies of scale are ubiquitous in new single-family homes throughout both the Census sale price and private cost estimating data. This is significant due to the volume of queries NAHB fields about construction costs. Almost invariably, the queries ask for cost per square foot. To avoid large errors, it is important the requesters realize that the number will change depending on the size of the home. If you apply cost per square foot for a 3,000 square-foot home to a home with only 1,500 square feet, for instance, you will drastically underestimate the home’s total cost. Ideally, this post will be able to serve as a reference in these situations.
