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Construction Costs and Commodities Price Trends

  • The cost to build homes has been rising much faster than the broader consumer price index.  In February the construction cost to build homes rose 7.8 percent from one year ago.  Cumulatively over the past 2 years, the cost has risen by 15 percent.
  • New home prices have been carrying a much larger premium over existing home prices in recent years.  One reason is due to some distressed properties in the existing home market.  But another factor is simply due to the higher cost to build new homes.  The median price of a newly constructed home was 38 percent higher than the median existing home price in February.  The gap has typically been about 15 to 20 percent in the past.
  • Less talked about but a likely possibility for the much higher new home prices may also be due to less competition among homebuilders.  The small guys have been effectively shut out of the market because of the extreme difficulty of obtaining construction loans.  Local community lenders have indicated the burdensome new financial regulations as to why they cannot easily make those loans.  In the meantime the big guys among the Wall Street-funded homebuilders like Lennar, KB Homes, Toll Brothers, and the like are having a field day with less competition.  As with anything, less competition means a higher price.
  • As to other prices, producer prices are well-behaved with only a 2 percent inflation rate on finished products.  But the crude producer prices rose faster at 6 percent in March.
  • Copper prices are markedly less expensive now than few years ago.  That is why there are fewer reports of thieving and stealing of copper wires from building sites in the past year.  Still, copper prices are at near the historical high end.  Gold prices, though not for homebuilding, are always worth monitoring as a key benchmark for overall commodity price movement and for a general measurement of “inflationary fears”. Gold prices have come off the very high points, though they are still at a historically high range.
  • Gold, because of its unique function as a store of value, has at times caused human misery.  Spanish conquistadors came to the New World to take gold from the Aztec Indians.  One story has it that when the Spanish approached a river crossing while being chased by the Aztecs, rather than dropping the gold behind and swim across, they tried to swim carrying the heavy load.  Nearly all drowned.  Separately, a good number of American 49ers who scrambled to San Francisco never struck gold.  Rather they died in gunfights among themselves.

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Lawrence Yun, PhD., Chief Economist and Senior Vice President

Lawrence Yun is Chief Economist and Senior Vice President of Research at NAR. He directs research activity for the association and regularly provides commentary on real estate market trends for its 1 million REALTOR® members.

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