Will Construction Costs Ever Come Back Down?

During “normal” times, few people take notice of the fluctuations in the construction cost of building or remodeling a home.  Prices go up and down, but generally, the overall cost creeps up a little bit every year. It’s what we’ve always experienced and expect.

2020 and 2021, however, have been something completely different.

Everyone noticed the rapid escalation in the price of lumber, since it was front-page news.  Shipping delays, labor shortages, border closings, forest fires, tropical storms – all contributed to a 300% or more lumber price increase in a very short time.

But it’s not just lumber – asphalt, concrete, gypsum, aluminum, and insulation materials were all in short supply and selling at record prices.

I was on a conference call with other Architects around the state a few weeks ago, discussing cost and supply issues.  An appliance manufacturer’s rep was invited to join us, and talked about the issues she’s seeing in the home appliance industry.  She shared that her company was holding a warehouse full of refrigerators, almost ready to ship – except that none of them had any insulation inside.  Storms along the Gulf Coast had idled the insulation plants.  No word on when they’d start up again.

Supply issues like that have changed the way home construction projects are run. Many products must be ordered before construction even starts to have any chance of them being delivered when they’re needed on site.

Windows and doors, for example, used to take about 6 weeks from order time to delivery – now it’s often double or triple that.

And the labor shortage has subcontractors scrambling and unable to keep up with the demand, adding to builders’ scheduling woes.

So will we ever get back to “normal” pricing and scheduling? Maybe, sort of, but there’s good news and bad news. Good news first.

There are a number of factors in play, including politics, job demand, interest rates, and public health. When people feel more comfortable getting back to work, production and delivery will pick up. More supply and quicker delivery should mean lower prices.

Record-low interest rates won’t last much longer, either – higher interest rates will decrease demand and put further downward pressure on pricing.

Very slowly, some of these issues are getting resolved.  We’ve already seen some easing in lumber delivery, and lumber prices have dropped almost as fast as they went up – although not to pre-pandemic levels.  Appliance manufacturers are getting more of the materials they need to finish and deliver their products. More asphalt is making its way to roofing manufacturers.

Assuming we don’t have a major resurgence in COVID-19, I expect that we’ll see significant improvements in construction costs and scheduling by summer 2022.

But as hopeful as that sounds, there’s a caveat – “improvement” in construction prices probably means stabilization, a slowing of the rate of increase – not significantly lower prices.

And that’s the bad news. What does that mean for the cost of building a home?

When Architects and builders put together an initial, very rough estimate for a custom home, we often use “square foot” pricing to help give our clients a potential range of cost for their project.  Ten years ago, in my part of the Midwest, a new custom home “square foot” price was somewhere around $175 per square foot.

Adjusting for ten years of inflation, that $175/sf would be about $272/sf today.

But that’s not what we’re seeing – initial cost estimates are coming in at $300, $350, and higher. Obviously, all of the (hopefully) temporary economic pressures noted above have added almost 30% to the cost of the homes I’m involved with, above and beyond normal inflation.

When those pressures end, prices should return to “normal” – in this case, around $272/sf. But I don’t expect that to happen. Once construction prices go up, they tend to stay up. I’ve seen prices spike up a few times in the past 25 years, and it’s always a “new normal”.

$300/sf or more for a custom home is a very big investment, but that’s where costs are now and will be for some time. If you’re thinking of building a new custom home, waiting for costs to come back to 2019 levels isn’t a good strategy.

But that doesn’t mean you can’t control the construction cost of your new home. A few years back I wrote an article about just that, and it’s more relevant than ever now. Here’s the link to that article:

7 Ways to Control Home Construction Costs

“Value” is a better way to look at a new home project than “cost” is, anyway.  Whatever the “cost” is, part of my job is to design homes that get the most value out of it.