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Cost to Build Single Family Homes Falls as New Builds Make Up Record Share of Supply

The cost to build a new single-family home fell in December as new builds now make up more than 1/3 of available housing supply.

February 4, 2022
February 4, 2022
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Based on construction and housing inventory reports, one might be led to believe that homebuilders are hanging out at empty lots throwing money into a bonfire.

Residential construction spending is at a 15-year high and inventory is a record low heading into the spring homebuying season. But with builders picking up the pace, the cost to complete a single-family home hit a 7-month low in December, according to data from the U.S. Census Bureau.

The cost to build a home directly affects what homebuyers end up paying for it. And with newly built homes making up a record 34.1% of the housing supply, more homebuyers may find themselves more entertaining this option.

In the final month of 2021, construction spending for single-family homes reached an annual rate of more than $435 billion. That’s up 16.2% from a year ago, and represents the highest spending rate since 2006.

The silver lining for homebuyers is that homebuilders are also completing single-family homes at a rate of 990,000 units per year – the fastest rate in 8 months. And for the second month in a row, the cost to complete a single-family home decreased.

At its peak in June 2021, it cost on average more than $447,000 to build a single-family home, based on the annual spending rate divided by the annual completions rate. Despite ongoing shortages of materials, lots, and labor, that cost is down to $439,000 per unit and possible on its way down as hiring picks up and supply chain issues untangle.

Historically speaking, this is a minor victory. The cost to build a single-family home has increased by $118,000 in just the last two years. Prior to the pandemic, it took 10 years for the cost to build to increase $92,000.

But single-family home construction is trending in the right direction, both in terms of output and costs. Construction employment is nearing its pre-pandemic level and there was a 6-month supply of new homes as of December 2021 – which is considered balanced. (It’s the 1.8 months supply of existing homes creating issues).

Homebuyers should not expect a substantial decline in new home prices anytime soon. However, the conditions for slower price growth seem to be in place.

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