What is the State of New Home Construction

According to the National Association of Home builders (NAHB) Construction Cost Survey, the average square footage of a new single-family home in 2017 was 2,777 square feet.

Another often-cited source for average home data comes from the U.S. Census Bureau. Due to significant differences in sample sizes, there is also a difference in statistics. U.S. Census Bureau data shows a drop in average square footage during the recession from 2,528 in 2008 to 2,402 in 2009. As the housing recovery progresses, it first hit a new high in 2014 at 2,711 square feet. It then declined slightly by 2016 to 2,637 square feet before going up again slightly in 2017 where it is roughly in agreement with the NAHB number (2,777 square feet).

Many factors go into both the cost and size of new construction. Certainly among the primary factors driving decisions that are controlling costs to maximize profit for houses with a new custom home design. Size and features that are in the highest demand are among the considerations. Materials, labor, and technology are key cost drivers. In recent years, builders have increased new homes sizes as a method of spreading costs across more square footage. But this may have reached an upper limit that is now beginning to trend downward.

Today, the trend may be tipping back towards slightly smaller new homes. Despite the slightly smaller size, estimated labor and material costs of constructing a single-family home increased 1.2% year over year in the fourth quarter to $244,000. This is the highest level since the Census Bureau began reporting it in 1988.

Considering the severe shortage of houses for sale, you would assume that new construction would be robust. Despite surveys showing higher builder confidence, new housing starts are up only marginally from 2017. January housing starts were 11.6% below the historical average. January 2017 new construction saw an annual pace of 1.24 million units. The January 2018 pace was 1.3 million units. This is a year on year increase of 4.8 %.

The chief economist for the NAHB cites these as major constraints holding back faster growth of new home construction:

• Labor shortage is being constrained by both availability and cost. With the national unemployment rate remaining below 5%, this is expected to continue impeding industry growth. Although approximately 1.5 million industry jobs were lost during the recession, as of December, only 800,000 positions had been filled.
• Rising lumber prices. In February, lumber prices were up 45% year over year. This situation is expected to worsen because of the new tariff on Canadian lumber prices. Smaller house sizes will help a little here but prices can be expected to increase anyway.
• Lot/land shortage. In 2017, both the cost and availability of developable land was cited as a constraint by 58% of builders. As of January 2018, this number has risen to 65%. Much of this is attributed to zoning restrictions and government regulations of where and what types of housing can be built.
• Government agency costs. According to the NAHB, there has been a 29.8% increase in regulatory costs between 2011 and 2016. Both higher fees and more agencies are blamed for the increase. These costs account for 24.3% of the final price which is roughly consistent as the percentage in 2011.
• Financing availability. Bank lending standards haven’t only been tightened for homebuyers. Available construction funds have been going mostly to multi-family projects since the recession. These have been considered less risky. This has restricted funds available for construction of single-family houses. However, this constraint is lessening. For more than four years, single-family construction financing has been steadily, if slowly, increasing.

According to Robert Dietz, chief economist for the NAHB, “In light of rising construction costs, builders have often favored higher-priced homes that can absorb the costs.”

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Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for seven years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. In the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.