I was in the building industry from 2001-2007 and then from 2015-2018. By 2018, it had gotten so difficult to deal with permitting authorities and find good subcontractors that I decided to stop building. Building a house is just a process, and the process itself had become such a grind that it wasn’t worth it.
I only mention this because recently I was asked to build a few rental houses for a former client. He said, “You built the same houses in 2018 for $84 a sq. ft., what do you think it would cost to build today?” I told him, “I don’t know, haven’t thought about it, but as a guess maybe $105 a sq. ft. Give me a couple days and I will find out.” I pulled up my old price list…and started calling suppliers and subcontractors to find out what the new prices were. Here’s a sample of what I found:
Material costs in 2018 vs 2022:
Concrete went from $101 a cu. yd. to $162. A 61% increase
Garage doors went from $600 to $1300, an 116% increase
Sod went from $100 to $155, a 55% increase
Shingles went from $22 to $36, a 63% increase
Labor costs from 2018 to 2022:
Framing – $2 to $5 a sq. ft, a 150% increase
Roofing – $30 a sq. to $60 a sq., a 100% increase
HVAC – $6000 to $9000 a 50% increase
In late 2018 the cost to build a basic yet comfortable one story home was $84 a square foot (not including land cost or builder profit). The house would sell for $140 a square foot, which we thought at the time was a great price for the home. We used $25 a sq. ft. as the cost for land, and $25 a sq. ft. for the builder profit.
That same home in 2022 would cost $130 a sq. ft. to build, an increase of 55%. The replacement cost of a home today, including the cost of land and builder profit would be a minimum of $175 a sq. ft. The owner decided it wasn’t worth it to build at that price.
Inflation is not going down but actually increasing
Based on the cost to build, the actual inflation rate is 55% in the last 4 years. Inflation in 2019 and 2020 was around 8% and for 2021 and 2022 it is over 20% (per year). Many think inflation has peaked but material and labor prices aren’t slowing down…they are still increasing, and at a faster rate. I think we are in the beginning stages of an inflationary spiral that will probably lead to hyperinflation.
With interest rates rising, the cost on the other end of the transaction – financing the home is increasing as well. The buyer is getting squeezed from both sides. This is why housing affordability is at record lows. House prices are up, financing costs are up, but thanks to inflation, the cost to build a house is up. Home prices don’t have much room to drop because the replacement cost is so high. The american people grow poorer.
The best one could hope would be for house inflation to slow to 0%, and for prices to stabilize. But prices won’t decrease…this is the new price ‘normal’. If the fed begins cutting rates, material prices will explode higher, from their recently ascended-to-high peaks. This might appear to be good for financial assets such as stocks, but it’s not, it will only obliterate what’s left of the american economy.
Should you buy a home now?
As much as I don’t want to say it, if you’ve been on the sidelines waiting to buy a home this might be the best time to do it. Especially if you can find one around replacement cost – $175 a sq. ft.