How the Cooling Housing Market Is Affecting Construction Costs

Posted :
August 29, 2022
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Arbor Builders
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If there is one thing that we can say about life today, it’s that we live in interesting times. This includes the housing market. 

Like the stock market, even during “normal” times, the housing market may rise and fall, but we now have broader challenges that are making buyers more cautious. Issues like slowing economies here and abroad, higher inflation, stock volatility, and the war in Ukraine are creating more questions than answers, and those questions are leading to fewer purchases. 

Up to now, the previous years of double-digit price increases, low-interest rates, and a greater push by owners to work from home drove up demand for properties that rivaled 2006 and 2007, but that pricing bubble popped, leaving us with the Great Recession. Given this, it may be good that the trend is moving downward, but today’s circumstances do create unique challenges for builders and buyers. 

Still, every market has an opportunity; it’s all about knowing how to work it. This article looks at what is currently changing in home pricing and construction costs and how buyers can approach buying today. 

The Current Situation

An inflated housing market still lingers, but we now have more issues to contend with. Globally, economies are slowing, interest rates are growing higher, and gas, oil, and food costs are rising — all affecting home purchasing. Demand is still up, but a downward sales trend is happening. Forbes has reported that nationwide, existing sales dropped 3.4% in May from April (an 8.6% drop vs. last year).

With the bad news comes the good news for buyers: Home price increases are less extreme. Escalating personal costs and higher interest rates are putting fewer people into the market for a home, and that means better deals for those who can buy.

Construction Costs Are Rising Higher than Normal

Fewer buyers are one factor, but higher construction costs are another, and those costs are creating unique challenges for builders. Historically in Oregon and country-wide, construction costs were typically on the rise, but over the last few years, pricing has jumped significantly. According to the latest data ending in the first quarter of 2022 from Mortenson’s Construction Cost Index, Oregon construction costs rose 18.6% annually in Portland, and that’s similar to the national average. 

When looking at the last two years, the jumps in pricing across the board are significant.

  • Up 152% for lumber. 
  • Up 119% for PVC piping.
  • Up 101% for conduit.
  • Up 83% for copper pipe.
  • Up 83% for plywood.
  • Up 75% for copper wire.
  • Up 67% for steel pipe.
  • Up 43% for reinforcing materials.
  • Up 37% for structural steel. 

All these increases were due to a surge in home buying that pushed supplies to the limit, but there were, and are, other challenges too. Examples are manufacturing issues and delays in the supply chain — and it doesn’t look like pricing will improve any time soon. The Associated General Contractors of America predicts that more increases are to come due to the issues in Ukraine, like rising food prices, a higher cost of oil, and an added factor of reduced labor. Cost increases are expected in every aspect of construction, from labor to material, equipment, and trade partnerships.

What All This Means

Gauging what the future holds for home pricing isn’t an exact science. The time between purchasing construction materials, building, and selling a completed home is long, and much can happen during that time. This year, patterns appear to point to higher price increases, though not as significant as before. There is also a high chance that interest rates will continue to rise. The economy is a large ship and difficult to turn quickly. We can expect a continuation of current trends due to higher personal expenses, higher construction expenses, and high interest rates, leading to fewer home buyers and lower home price increases. 

Is This All Good or Bad?

With fewer overall shoppers in the market, today’s buyers have a better chance of landing a home. Inflated demand proved to be a significant challenge for buyers in previous years, making it hard even to be considered. Now a shopper has a greater chance to buy and more opportunities to find a home that they love. 

For those who rely on mortgages, higher interest rates mean buyers on a budget will need to navigate the market more cautiously or keep costs down by choosing a lower-priced home than they would have last year. The current trend of lower price increases than in previous years will help, but price increases will likely still happen. To help budgets further, buyers can taper down their list of requirements to something more in their budget while still getting a quality home. For example, a builder who offers multiple homes of different sizes and varying design options, such as semi-custom and turn-key designs at varying price points, can benefit buyers. 

Cash buyers avoid interest rates, which gives them more flexibility. They can also reap the same benefits of buying now when they have more selection and while home price increases are reduced. They can also reduce their home needs and sit near the head of the line when buying. Sellers love cash. 

Buying a New Home Helps

One recommendation often cited during any ups and downs in the real estate market is buying a new home from a quality builder. Doing this reduces overall costs for the buyer in the long run while providing a home that the owner can be proud of for years to come. It also helps bring a higher dollar value when it’s time to sell. Even if material shortages remain in place, these cost savings of a new home make them worth the wait. 

The lower overall costs come from new equipment throughout the home, superior protection from the elements with new roofing and solid construction, reduced energy loss with quality windows, and built-in warranties on home systems that prevent out-of-pocket costs when issues arise. 

Arbor Builders: A Home for Any Budget

At Arbor Builders, we offer a wide range of homes at varying price points to help with any level of buyer for today’s market. You can order a custom home or opt to save more money with semi-custom or turn-key construction. Each option gives you a quality house that will last and a comfortable place to call home. 

Click here to tour our listing of current properties and learn how we can help you make the home of your dreams. 

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