The Cost of Construction

Tim Minton, executive officer of the Raleigh-Wake County Home Builders Association.

Homebuyers in the Triangle can’t help but notice the rising price of new construction in this area. New Homes and Ideas sat down with Tim Minton, executive officer of the Raleigh-Wake County Home Builders Association for an in-depth look at the underlying forces that are driving this upsurge in prices.

“What I want to emphasize first,” says Minton, “is that a home in the Triangle is still the safest and most reliable and secure investment out there.” Minton points out that real estate values in this area are steadily rising, and he stresses also the intrinsic community-building value of buying and owning a home.

The rise in prices for new-home construction cannot be attributed to any single cause.  According to Minton, myriad factors contribute to the final selling price of an individual home — from the price of raw land, to development costs, to market forces driving the demand and supply of construction materials.

“As more and more people move to the Triangle,” says Minton, “there is less and less land to develop.” The availability of land on which to build plays a large part in the price of property in a given area, and it’s the Triangle’s popularity as an outstanding place to live and raise a family, and increasingly, to retire that is making it a more expensive place to build a home. But the same forces causing this rise in land prices  — diminishing supply, increasing demand — can also be the very forces that ensure strong appreciation in home values for the area.

Area developers employ a variety of strategies to minimize the effect of rising land costs. Building further outside the urban center where costs are lower is one solution. Higher density, creative infill development of underutilized land within the urban core also reduces cost per unit.

The Cost of Development
Before the first foundation is poured, developers must undertake myriad expenses related to the development of raw land into a livable community. 
There are regulatory costs, from permitting to set-aside requirements. “These have skyrocketed in recent years,” says Minton. “What people need to realize is that if a certain percentage of a developers land is required to be set aside for, say open space, then that expense will ultimately be passed on to the buyer.”

Costs related to permitting can be quite significant as well, points out Minton. Environmental impact studies, engineers reports, legal fees related to zoning — all can represent a sizeable investment by the developer, before the property is even approved for development.

Rising regulatory fees also impact a new home’s final selling price. These fees — the charges levied by municipalities on new construction, for schools and roads and infrastructure — represent a sizeable chunk of the development budget. Many developers and builders argue that these fees unfairly burden new-home prices and are lobbying for different options when it comes to funding infrastructure.

And all of the costs for common amenities and utilities — the roads, the sewer, the sidewalks, and gated entries and swimming pools and clubhouses — all of the necessities, along with the bells and whistles that today’s homebuyers demand, contribute incrementally to the cost of each new home.

The Laws of Supply & Demand
A worldwide explosion in construction, especially in China, has resulted in market pressures for the commodities that make up the materials in the construction of a new home. Lumber, cement and sheetrock have been in short supply for several years, and the devastation of Hurricane Katrina last summer has only served to intensify these market pressures.

Though lumber prices are beginning to level off, they had in recent years reached an all-time high, and the rising demand for sheetrock and steel have likewise caused a steep increase in the cost of these materials. The Bureau of Labor Statistics’ indexes show the producer prices of materials used in single-family home construction up 6.9% for the 12-month period ending this past April.
In a May survey by the National Association of Home Builders (NAHB), 34% of participating builders reported shortages in drywall, in large part due to post-hurricane reconstruction in Louisiana and Mississippi. With some 10,000 square feet of wallboard in the average new home, even a slight increase in cost can have a material effect on a home’s final price.  

 
Meanwhile the cost of copper is on the rise. According to the NAHB, some 440 pounds of copper goes into the construction of a typical 2,100-square foot home — half in electrical wiring and the remainder typically in plumbing. “Copper has become so valuable,” reports Minton, “that we are seeing cases of people stealing copper from construction sites. They back a truck up the main panel and yank all the wiring from a home. You can imagine the damage that causes.” The NAHB estimates that increases in copper have boosted the average home price by $500 since January.

The rising market pressures of supply and demand also contribute hidden costs to a new home’s price. “If a builder has to wait for concrete or sheetrock, that is costing him money,” says Minton. “Every day of delay represents interest costs to that builder.”

“Oil prices also impact the costs of new-home construction,” says Minton. “All of these materials have to be transported, and the additional costs of rising fuel prices are passed on to the builder and in turn to the homebuyer.”

It’s a complex equation, all of the factors that contribute to the selling price of a new home in the Triangle. Land values, development expenses, the rising cost of raw materials — all of these, and more, play a role. Tim Minton wants to remind buyers that area builders and the local and National Home Builders Associations are constantly seeking creative strategies to mitigate escalation in new-home prices: innovative land use, lobbying efforts, exploration of alternate materials and promoting increased production capacity, to name just a few. “And the bottom line,” says Minton, “a new home is still one of the best investments you can make.”

 
Paul Kerr is a Freelance Writer