COVID 19's Impact: Exploring the Rising Costs and Affordability Challenges in Single Family Home Construction

Decoding the Costs of Single-Family Home Construction

During the COVID-19 pandemic, significant increases in construction costs have been observed, primarily affecting labor and materials which constitute the largest expenses in single-family home building. These cost surges often manifest as higher sales prices, thereby impacting affordability.

Prior to the pandemic, the Producer Price Index PPI for construction services and goods had shown a steady upward tr, with service sector pressures outpacing those of goods as depicted by Figure 1.

However, after experiencing an initial dip at the start of the pandemic, the PPI for construction goods surged dramatically starting in early 2021. This rapid increase reached double-digit annual growth rates by March 2021 and continued until its recent decline to single-digit growth in December 2022 while remning notably above historical averages.

Contrary to this pattern, the PPI for construction services initially experienced a downturn; yet after recovering, it showed sharp rises during the first half of 2021 before declining. It picked up agn during the latter half of 2022.

The Impact on Home Sales Prices

Table 1 illustrates how an increase in the PPI translates into higher sales prices when construction costs account for a certn percentage of the sales price. For instance, if the PPI increases by 10 and construction expenses are equivalent to 60 of the sales price, the final home cost would rise by 6.

To illustrate this further:

• A $250,000 new home would see an additional $10,500 in costs due to a PPI increase of 10, resulting in a total sale price of $260,500.

• The same scenario with a $350,000 new home would lead to an extra $21,000 in cost and a total sales price of $371,000.

• For a $450,000 new home, the additional costs due to a PPI increase of 10 amount to $31,500, making the final sale price $481,500.

Affordability Implications

The calculations in might underestimate the full impact on the sales price of a new home as changes in construction costs influence more than just these figures. Therefore, the effects could be significantly greater in reality.

Dr. Sarah Losey, previously an assistant research economist at the Texas Real Estate Research Center at Texas AM University and now a housing economist for the Austin Board of Realtors, has conducted extensive work on this topic.

For further information or to access more publications from TRERC, please visit their official website: https:www.texasrealestateresearchcenter.org

The Texas Real Estate Research Center TRERC at Texas AM University is recognized as the nation's largest publicly funded organization dedicated solely to real estate research. Established by state legislation in 1971, TRERC serves a diverse audience including professionals in the real estate industry, educators, researchers, policymakers, and the public.

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