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BY Mike LaFirenza
Rising real estate prices and interest rate hikes have finally started to bring balance back to the residential market this year. But while demand is falling off, the U.S. still has a major need for new homes, which could create plenty of opportunity for residential builders.
One of the major factors that contributed to the heightened competition for housing over the last two years was housing supply. The U.S. suffered from a severe shortage of housing stock before COVID-19, and the pandemic sent available inventory to record lows. With a rush of buyers in the market, the limited availability of homes stoked competition and pushed prices higher.
Builders have rushed to meet the need for new units. Housing permits and starts bounced back strongly after falling sharply early in the COVID-19 pandemic. And despite a recent downtick, housing starts have been higher this year than at any other point since before the Great Recession.
While the construction industry has seen high levels of activity, recent conditions have nonetheless been challenging. Inflation has increased the cost of building materials by 33% since the beginning of the pandemic, and supply chain challenges over the last two years have contributed to increased costs and project delays. Construction firms have also struggled to hire and retain labor, and many have raised wages in efforts to do so.
Further, the relative cost of building a new unit has increased over time. Three decades ago, the average construction cost per residential unit in 2021 dollars was $168,452. That figure today is $218,791. And notably, the construction cost per unit has outpaced the rate of inflation over that time, rising by around 7.6% just in the last decade.
The rising costs of construction have taken place even as single-family home construction has fallen. Over the last decade, the proportion of single-family homes has decreased by more than 13%. Because single-family construction tends to be more costly than larger developments on a per-unit basis, this trend reinforces that construction costs overall are on the rise.
Beyond unit type, a number of other factors can contribute to how much residential units cost to build. Supplies, labor, and other costs may vary by the region where construction is taking place. And market conditions or a jurisdiction's policies can also impact whether new units are high-end or affordable, or how easy it is to add single-family or multi-family units.
For that reason, the average cost of construction per unit can vary substantially across the country. Hawaii is the most expensive state to build new units with an average value per unit authorized of $403,596, a product of local regulations and the islands' geography and distance from the mainland. But second in cost is Wyoming ($391,030 per unit), which has different challenges, including a lack of homebuilders. At the local level, many of the locations with the highest costs for new homes are among the most expensive real estate markets in the U.S., including the Bay Area and wealthy suburbs of New York.
The data used in this analysis is from the U.S. Census Bureau's Building Permits Survey (2021), the most recent data available. To determine the locations where the most expensive homes are being built, researchers at Construction Coverage calculated the average permit value per unit authorized. Authorized units included both single-unit and multiple-unit structures. It's important to note that the value of the building permit does not reflect the ultimate market value of the unit, but rather the total value of all construction work for which the permit is issued.
The analysis found that authorized units in California have an average permit value of $240,504, compared to $218,791 per unit nationally. Out of all states, California has the 13th highest average new construction value. Here is a summary of the data for California:
- Average value per unit authorized: $240,504
- Total value of units authorized: $28,724,878,000
- Total units authorized: 119,436
- Single-family units as a proportion of total: 55.2%
For reference, here are the statistics for the entire United States:
- Average value per unit authorized: $218,791
- Total value of units authorized: $380,036,187,000
- Total units authorized: 1,736,982
- Single-family units as a proportion of total: 64.2%
For more information, a detailed methodology, and complete results, you can find the original report on Construction Coverage's website: https://constructioncoverage.com/research/counties-where-the-most-expensive-homes-are-being-built-2022
