As the landscape of the housing market continues to evolve, one topic continues to remain at the forefront: affordability.

It’s a topic we frequently explore on this podcast because it touches every facet of the property market, including the rising costs of construction. With more people moving to more affordable regions, there’s a notable impact on both home prices and the costs associated with building new homes.

As inflation remains elevated, people are migrating to more affordable areas, and the construction industry is feeling the strain with a shortage of workers, causing affordability to erode.

Building a house involves numerous components — drywall, copper pipes, shingles, and more. Each of these materials, along with labor costs, plays a significant role in the overall price of construction. While the prices of materials have decreased since their peak during the pandemic, the overall cost of building remains a challenge due to labor shortages and other economic pressures.

To delve deeper into the dynamics between material and labor costs and affordability in the housing market, host Maiclaire Bolton Smith is joined by Jay Thies, associate vice president of Pricing Analysis and Delivery at CoreLogic.

In This Episode:

2:30 – What has changed in recent months in terms of construction and labor prices?

5:59 – How will declining material costs influence new construction trends?

7:45 –  Erika Stanley goes over the numbers in the housing market in The Sip.

9:24 – There is increasing interest in the construction trades. How will this affect the property market long-term?

12:11 – How are natural catastrophes affecting labor and material costs?

13:31 – Is there a correlation between population migration patterns and the price of labor and materials?

16:29 – In which markets are construction prices cooling off?

17:24 – Crystal Ball: What does the future of labor and material costs look like?

19:35 – Erika Stanley reviews natural catastrophes and extreme weather events across the world.

Up Next: Is There Actually a Lumber Shortage?

Links:

• Construction Cost Update Report
• Texas Hail(ed) 2023 a Record-Breaking Year for Insured Losses
• Hazard HQ Command Central
• Read CoreLogic Intelligence

Find full episodes with all our guests in our podcast archive here: https://clgx.co/3HFslXD4 Copyright 2024 CoreLogic

Jay Thies:

In terms of labor, we see that steadily increasing and we're going to see a higher rate of change than we normally would. Typically, if you look back decades in the past, we see the steady kind of 3%-ish per year that kind of tracks with the general wage rate. Probably going to see that accelerate along with what we call soft costs.

Maiclaire Bolton Smith:

Welcome back to Core Conversations: A CoreLogic Podcast where we tour the property market to investigate how economics, climate change, governmental policies and technology affect everyday life. I am your host, Maiclaire Bolton Smith, and I'm just as curious as you are about everything that happens in our industry.

Affordability. We talk about it all the time on this podcast, but that's because it affects nearly every aspect of the property market, even construction costs. As people flock towards more affordable markets, there has been a corresponding increase in home prices. That's not news, but what you may not know is how these migration patterns have affected the material costs and labor market behind home building.

Homes are made up of lots of pieces, drywall, copper pipes, plywood, shingles, and the list goes on. The cost of each of these little parts can affect the cost of insurance, remodels, and new builds. Add to that equation the variable cost of labor, and when these two factors begin putting upward pressures on cost, it affects the overall housing market.

So to understand the nuance of these costs, how they affect the overall prices of homes, and then dive into how this affects both short and long-term affordability, we have Jay Thies, an Associate Vice President of Pricing Analysis and Delivery here at CoreLogic.

Jay, welcome to Core Conversations.

JT:

Super happy to be here. Thanks, Maiclaire.

MBS:

Okay, so let's start off by just talking about what we've seen in the construction material cost and labor prices. There's been huge movements. Can you just talk a little bit about what's changed in recent months and why do we monitor these fluctuations?

Erika Stanley:

Before we get too far into this episode, I wanted to remind our listeners that we want to help you keep pace with the property market. To make it easy, we curate the latest insight and analysis for you on our social media where you can find us using the handle @CoreLogic on Facebook and LinkedIn or @CoreLogicInc on X, formerly known as Twitter and Instagram. But now let's get back to Maiclaire and Jay.

JT:

Sure. So post-Covid and the pandemic, there was a lot of movement in certain categories, primarily around lumber. So lumber shot up a huge amount as everyone was kind of working on their own home. People were building decks, people were doing home renovation projects, trying to keep busy, in addition to a bunch of lumber mills shutting down and having to spin back up, and it takes a little while for a lumber mill to spin back up.

MBS:

Sure, yeah.

JT:

So there's a lot of supply demand issues going on with lumber and some other things, steel shot up, so there's a lot of cost pressures on materials that happened post-pandemic. More recently we've seen that cost pressure decline quite a bit in the lumber sector. We're not sure if we've seen quite bottom yet, but we continue to see downward pressure on lumber prices, and there's a lot of other construction components that are also slightly declining, and that has a lot to do with the overall market for new housing construction because we're seeing a lot of pressure there relative to two major forces. One being the increased interest rates, which are putting pressure on new home builders, as well as just general overall labor supply, which I'll talk about a little bit more.

MBS:

So you did allude to the fact that this has gone down, but can you talk a little bit about how dramatic was that spike and how has it come down since that in the past, I guess two and a half, nearly three years now?

JT:

Yeah. So lumber went pretty crazy. We saw the price of a 2x4 here in the Massachusetts area go from $3 or so for a 2x4x8, up to just shy of $9, so almost tripling in price. Overall, I think the general price increases across lumber were somewhere to 60 to 70%.

We've seen almost all of that now back off to the point where we're slightly just above pre-pandemic lumber prices. We're still seeing some downward pressure, so it's been a bit of a roller coaster. And what that's done really is we've tried to make sure that we pay attention to that and not react to that too quickly because it's easy to chase up a number. It's a little harder to come down off a number if you think that it's going to come down at some point.

MBS:

So what do you think this means from an insurance perspective or even construction perspective? Are we seeing more building now because prices have come down?

JT:

So it's definitely helped in terms of reduce the overall cost of a new build or a reconstruction. So whereas we saw builders increasing the price of an average home 10 to 20%, that's no longer there. Now, what has increased over time and it's somewhat supplemented this is overhead cost for contractors, which we can talk about a little bit.

MBS:

Of course, yeah.

JT:

But in general, material prices have come back down to what we would say more reasonable prices relative to pre-pandemic.

MBS:

Okay. Yeah, so you touched on a little bit too about the new construction there, and we chat quite frequently on this podcast with our economists as well about how there really was a lack of inventory and a lack of new builds in particular during the pandemic.

Do we think that this is changing now? Do we think that because construction costs are coming down slightly, do you think that it may lead to us having more construction? Are we going to see a construction boom or is that something that we don't really see happening?

JT:

Now what we're seeing is we're seeing retirement of the baby boomer generation and they're not being replaced by younger generations coming into the construction trades like electricians, plumbers, HVAC, carpenters, et cetera. And what that's done is really put a lot of pressure on the supply demand dynamics around construction labor, and really that's what's forcing most of the issue right now. Like I mentioned, the material prices have come down to a little bit more reasonable, but until there's a balance of the supply of labor, which we don't see unless there's some type of government intervention or other encouragement into the trades ...

MBS:

Interesting.

JT:

That's not going to change for anytime soon.

ES:

It's that time again. Grab a cup of coffee or your favorite beverage. We're going to do the numbers in the housing market. Here's what you need to know.

Home sales seem to be stuck in second gear this year. While home prices continue to remain elevated, there are more homes coming onto the market. This welcome chain suggests that housing markets are gradually normalizing. In markets like Florida, Texas, and the US Southeast demand has cooled from last year's frenzy and home price growth is rapidly decelerating. The top five coolest markets are New Orleans, Austin, Texas, San Antonio, Texas, Cape Coral, Florida, and North Port, Florida. In contrast, markets in the northeast and the west still have inventory shortages and are posting the strongest home price gains.

To learn more about the latest in the property market, visit the link in the show notes. And that's The Sip. See you next time.

I think that's what I want to talk about next is this labor shortage and what is the solution here. And you did mention some sort of government intervention. I also think of we are in the tech world these days and everything is new high technology and we hear a lot about 3D building of homes and modular homes. Is that a solution here for some of the labor issues or labor concerns that we've seen or what are your thoughts on some of that?

JT:

Yeah. So it's somewhat interesting because there's an element to the construction trades which have kind of been downplayed over time, and I think of myself as, I'm Xennial, so raised by baby boomers and there was a large push, and Mike Rowe and some others have spoken on this quite a bit, there was a large push for folks to go to college and do other things besides be in the trades. And that really we're seeing the ramifications of those decisions of now because the labor pool is not there.

We're starting to see a little bit more interest into the trades now that the labor rates have come up and are continuing to climb. But really what needs to happen is at both a local state and government level, there needs to be more focus on getting folks into vocational schools, getting into trade programs and learning those particular trades so that the stock of employees for construction trades can get increased.

And this is something that's going to take a while. It's not like if something's enacted right now that that's going to make a change over two years. This is really something that's a decade-long problem in order to get the next generation of folks filling those seats, especially as baby boomers retire. There's still a lot of boomers that are working into their 60s and 70s. That's going to further exacerbate the labor shortage.

MBS:

I'm really glad you mentioned that because that is, I mean, in many ways it's a cultural shift too. I think that this was back in our parents' generation, these were great careers and we really kind of moving into the dotcom era and the world of technology and everybody really was pushed to do more of a technical career path and these were trades were sometimes not as ... weren't as promoted as highly. So I think there's maybe not the awareness of these being really good jobs for potentially for young people to go into.

JT:

Absolutely. And I think to the second part of that, in terms of insurance, really it's caused escalation and cost as insurance because you've got a combination of not only higher labor rates and more pressure on restoration companies, but you've also got increased frequency and severity relative to catastrophe events and other non-weather events that have been occurring. So it's kind of the perfect storm of an industry that is growing as a result of supply demand pressures combined with an industry that is seeing increased severity damage, increased frequency damage, and really combining into kind of an economic problem.

MBS:

Yeah, no, absolutely. And I'm glad you mentioned that because I think we've talked on this podcast before about obviously climate change and increasing severity of natural hazards. We have seen insurers in areas, especially California, that are making different decisions on where they write business because of primarily we hear the two factors being the increased severity of natural hazards and the skyrocketing reconstruction costs. So the cost of labor and material really is a huge part of that as well.

JT:

Absolutely. And it's a unique situation for some of the states because there's increases in the catastrophe events, and it's difficult because as an industry we're trying to lean more into the predictive modeling end of things to say what's going to happen in the future. A lot of what insurers will rely on is retroactive data. And retroactive data can tell you what has happened, but in order to project what is going to happen and how to keep up with the costs that are going to be happening over the next year, two years, five years, that's really where the industry needs to evolve and move towards.

MBS:

Right. And really the value of some of the data and analytics, that does show what could happen.

JT:

Absolutely.

MBS:

Yeah.

Something else I do want to talk about because listeners of this podcast will know that when we talk with our economists, one thing that often comes up is that migration, and we refer to it commonly now in these days as pandemic migration, really just people moving out of the major metropolitan cities into some more rural areas. There's been huge migration to Texas and into the Midwest, and along with that, are we seeing correlation with the prices of labor and materials to where people are moving because potentially there may be more demand for more homes to be built?

JT:

Yeah, absolutely. So what we're generally seeing in some areas is the outward flow of higher income levels to lower income level areas. So what that does is it creates, again, another complexity to supply and demand of labor because if a individual is less price sensitive to the cost of construction and the willingness to pay is there, relative to others within the area, you can drive up artificially the demand and that places pressure on price.

So some areas that we've seen that, for example, are more of the resort areas where we've had folks flock from West Coast cities with higher incomes to areas of Colorado, for example, areas of Wyoming, various different resorts-

MBS:

Florida.

JT:

Florida, Texas. Exactly. And that's really put pressure on those existing markets, which historically had been more cost conscious and now have more folks with the willingness to pay for those additional and put themselves at the front of the line in terms of construction projects.

MBS:

Yeah, yeah. I guess let's look at the opposite side of that, talking about migration of where people have moved to. What about those places where they've moved from? California always historic, everything's more expensive in California. So are we still seeing increased costs and crisis increasing in California and labor shortages in California where there may be actually less demand?

JT:

Yeah, no, we are seeing economics play a force here. So where folks are migrating out of, we are starting to see not necessarily depression in prices, but leveling of prices and not the rapid acceleration that we're seeing in other markets. So a good example of that is Austin that we've been looking at. So that's an area that was very much up in building and that has slowed down a bit, so we're seeing prices level out in that particular region.

California is another good example where traditionally it's been very high, although it's kind of maintained itself recently, but we see other markets, for example, like Portland, Maine, which are growing. So historically that's been a little bit of a calmer market, but we've seen a lot of development in that particular area. Charlotte, North Carolina is another area that seems to be up and coming. So as you have, again that migration there, you see some markets going up, some markets going down or at least leveling off.

ES:

When Jay mentions the up and coming markets where his team is tracking prices, he's referring to markets with identified upward price pressures in migration and new development. Currently, the top five markets are Detroit, Michigan, Charlotte, North Carolina, Cheyenne, Wyoming, Coeur d'Alene, Idaho, and Nashville, Tennessee. To learn more about regional price fluctuations, check out CoreLogic's monthly construction cost update. A link is in the show notes.

JT:

Here at CoreLogic what we really try to do is pay attention to those particular markets and look at has a market potentially peaked? Is a market starting to decline because that really affects the pace of change, especially in the labor pool.

MBS:

Right. Wow. Okay. So Jay, pulling out your crystal ball, what do we think is on the horizon for construction material, labor costs for the latter half of the year and into the future as far as you can see with your crystal ball? What do you think is going to happen?

JT:

Yeah, I get asked this a lot. So I'd say for material, I'll take the three components. So we talked about material and labor, and I'll talk a little bit about soft costs. So material wise, we see probably a leveling or a slight decline in material based on decreased demand. So depending on what the Fed does with rates and depending on how the housing market responds to that change, like we anticipate there's probably just going to be a level flatness. Now that could change depending on civil unrest, it could change depending on if there's issues with lumber supply in Canada or if there's oil supply issues, et cetera. But general-

MBS:

Or if there was a major natural disaster. That may impact things as well.

JT:

Absolutely, absolutely. In terms of labor, we see that steadily increasing and we're going to see a higher rate of change than we normally would. Typically, if you look back decades in the past, we see the steady kind of 3%-ish per year. That kind of tracks with the general wage rate. Probably going to see that accelerate along with what we call soft costs.

So soft cost is the other component of the equation here and what those really entail are all those overhead costs that a contractor or a subcontractor or tradesman might have. Those have really escalated in the past two years relative to inflation. So if you think of the cost of insurance, the cost of buying a vehicle, the cost of maintaining real estate taxes, et cetera, all that has gone up exponentially.

So those are continued pressure. We don't think all the costs have quite been baked into all the industries yet. So if you look at the economics of things and kind of the rolling segments of the different areas of the economy, we're probably almost done, but there's still a couple segments of the economy that probably still need to take some additional costs.

MBS:

Okay.

ES:

Before we end this episode, let's take a break and talk about what's happening in the world of natural disasters. CoreLogic's Hazard HQ Command Central reports on natural catastrophes and extreme weather events across the world. A link to their coverage is in the show notes.

Mid-May brought a derecho to central Texas. A derecho is a widespread long-lived windstorm that extends more than 240 miles and includes wind speeds greater than 58 miles per hour. The storm passed by the population centers of Houston, as well as New Orleans and Baton Rouge, Louisiana, bringing wind gusts of over 75 miles per hour reaching across a 500-mile stretch. CoreLogic identified nearly 200,000 residential properties impacted by winds of 90 miles per hour or greater in the Houston metropolitan area.

I'm glad you mentioned inflation. I mean, obviously we talk about that a lot in this podcast as well too. Molly Boesel and I had this conversation about how it's $12 for a pint of ice cream these days. So when we think of how expensive everything has gotten, to hear that something like building costs or material may not be skyrocketing to the levels that we had seen in the past is, I mean, my husband told me the other day he wants to build a deck, and instantly I thought, "That's going to be really expensive," but now you're telling me that maybe it's okay.

JT:

Yeah. So funny enough, I'm actually working on a deck at my house right now, and I waited for the costs to come down. I just actually ran to Home Depot and got a 2x4x12, and it was down to ... a pressure treated even. It was down to about nine bucks. So that's more reasonable than-

MBS:

Definitely-

JT:

... what we saw post-Covid, which was probably around 20-something dollars for that same piece.

MBS:

That's crazy. Wow. Yes. That's when we started building a greenhouse, during Covid, as many people did with these skyrocketing prices of labor and material.

Jay, this has been so great. Thank you so much for joining me today on Core Conversations: A CoreLogic Podcast.

JT:

Yep. Thanks, Mailclaire.

MBS:

And thank you for listening. I hope you've enjoyed our latest episode. Please remember to leave us a review and let us know your thoughts and subscribe wherever you get your podcast to be notified when new episodes are released. And thanks to the team for helping bring this podcast to life, producer Jessi Devenyns, editor and sound engineer Romie Aromin, our facts guru Erika Stanley, and social media duo Sarah Buck and Makaila Brooks. Tune in next time for another Core Conversation.

ES: