A new analysis of the housing market has found that substantial differences in the price of labor have become the primary reason for stratifying construction costs across the country.
Construction costs have jumped 23.6 percent since 2004, according to “What’s Up With Construction Costs?” a new report by BuildZoom economist Issi Romem. The housing cost spike that started in the mid-2000s at the tail end of the pre-Recession building boom was initially caused by increases in material costs; the continued rise is now mostly a factor of rising labor costs.
Romem notes that the key drivers of construction costs are still “lots and local regulations,” the combination of high land prices and restrictive land-use policy. But in especially expensive metros, labor costs have also vastly accelerated the cost of construction.
In expensive, often unionized, metros, labor costs run far above the national average. Labor costs in New York City are 31.3 percent higher than the mean of the top 30 largest cities, 25.6 percent higher in San Francisco, and 16.8 percent higher in Chicago. The recent building boom has also been hampered in many cases by a persistent shortage of workers, which drives up wages and costs.
San Francisco’s vicious construction labor cycle
Romem’s research led him to speculate on another reason high-cost coastal cities such as San Francisco see such heightened construction costs: a shift toward more renovation work, which he observed by plotting out the appreciation of labor costs and the share of building permits corresponding to new construction.
Since zoning and other regulatory restrictions make it so time-consuming and cost-prohibitive to build new housing, the San Francisco market has recently focused on renovations. In terms of labor costs, renovating, repairing, and restoring older buildings can be more timely and labor-intensive than constructing new homes. Because of this, Romem believes this phenomenon has put upward pressure on labor costs in the San Francisco market and created a vicious cycle. Fewer new homes leads to higher labor costs, which in turn makes it more expensive to build new homes (marginally worthwhile residential development, when higher wages are taken into account, become less attractive).
As the pool of potential homebuyers becomes more wealthy and selective because of the market’s rising costs, the need to upgrade older homes to be competitive drives additional renovation.
Romem is torn on whether to view this as a problem or not; the increased costs lead to better wages and rising income for workers in the Bay Area.
Future of construction costs
Romem doesn’t forecast any immediate relief on the horizon, especially in cities with restrictive zoning and building codes that make it harder to create new housing supply. But he does see relaxed zoning, and a subsequent ramp-up of construction, as a way to quickly cut these costs.
Training more workers to meet the labor shortage in the building trades is a useful, but long-term, solution. Others see technology as a potential savior; numerous startups and new prefab companies have raised money to develop more efficient construction methods.
While tariffs haven’t had a significant impact in Romem’s research, he says just the threat of further trade action could lead to increased costs.
“The uncertainty about tariffs is as important as the tariffs themselves,” he says. “It could be a lot more serious in the future.”