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If you're working on a development pro forma and trying to figure out what construction costs might be at some point in the future, the surest bet is to assume that they will be more than they are today and that they will grow at a rate that exceeds the rate of inflation. And here's some historical data to back up this claim.
What here is, is a great post by Brian Potter, where he looks at various construction cost indices from about the last century to try and answer the question: does construction ever get cheaper? While the answer to this question is technically "yes", it is doesn't happen all that often. Typically, the average yearly increases look something like this:
And if you net out CPI from these figures, you get a table that looks like this:
Blue means that the respective index grew faster than the rate of inflation, and red means that it grew less than (or the same as) the rate of inflation. And here we obviously have more blue than red.
So what's causing this?
Well, if you break out material costs, as Potter has done, you'll see that over the same time period, building materials don't usually follow this same trajectory. Instead, they tend to rise at or below the rate of inflation. What this suggests is that the culprit is likely labor costs, which would be consistent with the fact that construction labor productivity has been steadily declining since probably the middle of the 20th century.
Tables: Brian Potter
In 1973, 580,000 mobile homes (or manufactured home as they are now called) shipped in the United States. This represented about 50% of the number of single-family housing starts that year, and about 22% of total housing starts. So they represented a significant chunk of the overall housing supply.
But following the collapse of the US housing market in 1974, an interesting thing happened. Manufactured homes never managed to reclaim their position in the stack. See above chart. Brian Potter, author of Construction Physics, puts forward a number of possible explanations for this, over here.
Some have speculated that it was the result of new code changes that ended up increasing costs. Some have speculated that it was because of a new requirement to include a steel chassis on the bottom of every home, which also increased costs, but more importantly stigmatized manufactured homes. It made them seem transient, whereas previously they were installed on permanent foundations.
There are also some theories that manufactured home production was harder hit during the economic downturn given that they had more fixed plant costs (compared to site-built homes with their variable labor costs).
But Brian's current working theory is that it comes down to capital flows. Manufactured homes tend to cater to lower-income buyers and so supply, as the argument goes, has largely depended on "lax lending" practices being made available to them.
I'm not so sure that this is the only reason though. For one thing, multi-family housing starts have followed a somewhat similar trajectory to manufactured homes. We've certainly seen an increase in supply over the last decade, but we've never gotten back to that early 1970's peak.
And so I wonder: How much of this is actually just the result of the single-family home hegemony? This is arguably what the market has historically wanted (look at the split pre-1973 in the above chart), and so perhaps we simply refocused our attention there and worked to make this housing type as accessible as possible to the masses.
Chart via Brian Potter
Housing supply is one of those topics that a lot of people can't seem to agree on. Some people, including annoying city bloggers from Toronto, will tell you that we're not building nearly enough new housing. While others will tell you that, no, everything is just fine. We are totally building enough to meet demand.
So today I am going to encourage all of you to read Brian Potter's latest Construction Physics article. In it, he answers the question: Is there a housing shortage or not? But just in case some of you don't feel like doing that, here is the tl;dr:
You can't look at construction rates alone and infer whether or not you have a housing shortage. There are so many other factors to consider, including household size (see above chart). A drop in household size alone, for example, means that you need more housing, even if nothing else is going on.
The US is probably short at least several million housing units right now.
Vacancy rates, within a market, are pretty useful for predicting housing cost increases. When vacancy rates fall, prices go up. This is one reason why housing supply matters.
Looking at the gap between population increases and housing supply increases is "hilariously non-predictive" if you're trying to determine whether or not you need more housing. We've all seen this before: This city added X people, but only constructed Y new homes.
Finally, there is an extremely strong correlation between housing supply restrictions (i.e. land use restrictions) and home prices. It turns out that the harder we make it to build new homes, the more expensive they become.
So yeah, Potter's article is definitely worth a read when you get a moment.
Chart via Construction Physics
If you're working on a development pro forma and trying to figure out what construction costs might be at some point in the future, the surest bet is to assume that they will be more than they are today and that they will grow at a rate that exceeds the rate of inflation. And here's some historical data to back up this claim.
What here is, is a great post by Brian Potter, where he looks at various construction cost indices from about the last century to try and answer the question: does construction ever get cheaper? While the answer to this question is technically "yes", it is doesn't happen all that often. Typically, the average yearly increases look something like this:
And if you net out CPI from these figures, you get a table that looks like this:
Blue means that the respective index grew faster than the rate of inflation, and red means that it grew less than (or the same as) the rate of inflation. And here we obviously have more blue than red.
So what's causing this?
Well, if you break out material costs, as Potter has done, you'll see that over the same time period, building materials don't usually follow this same trajectory. Instead, they tend to rise at or below the rate of inflation. What this suggests is that the culprit is likely labor costs, which would be consistent with the fact that construction labor productivity has been steadily declining since probably the middle of the 20th century.
Tables: Brian Potter
In 1973, 580,000 mobile homes (or manufactured home as they are now called) shipped in the United States. This represented about 50% of the number of single-family housing starts that year, and about 22% of total housing starts. So they represented a significant chunk of the overall housing supply.
But following the collapse of the US housing market in 1974, an interesting thing happened. Manufactured homes never managed to reclaim their position in the stack. See above chart. Brian Potter, author of Construction Physics, puts forward a number of possible explanations for this, over here.
Some have speculated that it was the result of new code changes that ended up increasing costs. Some have speculated that it was because of a new requirement to include a steel chassis on the bottom of every home, which also increased costs, but more importantly stigmatized manufactured homes. It made them seem transient, whereas previously they were installed on permanent foundations.
There are also some theories that manufactured home production was harder hit during the economic downturn given that they had more fixed plant costs (compared to site-built homes with their variable labor costs).
But Brian's current working theory is that it comes down to capital flows. Manufactured homes tend to cater to lower-income buyers and so supply, as the argument goes, has largely depended on "lax lending" practices being made available to them.
I'm not so sure that this is the only reason though. For one thing, multi-family housing starts have followed a somewhat similar trajectory to manufactured homes. We've certainly seen an increase in supply over the last decade, but we've never gotten back to that early 1970's peak.
And so I wonder: How much of this is actually just the result of the single-family home hegemony? This is arguably what the market has historically wanted (look at the split pre-1973 in the above chart), and so perhaps we simply refocused our attention there and worked to make this housing type as accessible as possible to the masses.
Chart via Brian Potter
Housing supply is one of those topics that a lot of people can't seem to agree on. Some people, including annoying city bloggers from Toronto, will tell you that we're not building nearly enough new housing. While others will tell you that, no, everything is just fine. We are totally building enough to meet demand.
So today I am going to encourage all of you to read Brian Potter's latest Construction Physics article. In it, he answers the question: Is there a housing shortage or not? But just in case some of you don't feel like doing that, here is the tl;dr:
You can't look at construction rates alone and infer whether or not you have a housing shortage. There are so many other factors to consider, including household size (see above chart). A drop in household size alone, for example, means that you need more housing, even if nothing else is going on.
The US is probably short at least several million housing units right now.
Vacancy rates, within a market, are pretty useful for predicting housing cost increases. When vacancy rates fall, prices go up. This is one reason why housing supply matters.
Looking at the gap between population increases and housing supply increases is "hilariously non-predictive" if you're trying to determine whether or not you need more housing. We've all seen this before: This city added X people, but only constructed Y new homes.
Finally, there is an extremely strong correlation between housing supply restrictions (i.e. land use restrictions) and home prices. It turns out that the harder we make it to build new homes, the more expensive they become.
So yeah, Potter's article is definitely worth a read when you get a moment.
Chart via Construction Physics
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